Actuarial Projections

At yesterday’s meeting of the New Jersey State Investment Council there was a presentation from Aon Hewitt on how the NJ Retirement System would fare into the future. As reported:

If all that happens, the pension fund could be could be 93 percent funded within three decades.

…….

The analysis indicates scaling back to a portfolio that’s 60 percent return-seeking would sit at 81 percent funded within 30 years and one that’s 40 percent return-seeking would be at 68 percent.

I can’t find the repo0rt on their website but I suspect it’s a typical spreadsheet where the same interest rate is applied to each column with no consideration of real-world (or even New Jersey-world) vagaries. All it would show is that Aon has someone on staff who knows Excel.

Where are the projections done in 1986 showing 30% funded ratios in 2016?

Without any examination of what the assets and their real values are or of the ability of remaining taxpayers to come up with 6% more each year these actuarial projections have no utility beyond propaganda.

25 responses to this post.

  1. Posted by Brian on March 29, 2018 at 8:59 am

    If their entire analysis is based on a simple, deterministic projection at a single interest rate, then shame on them. They should be doing a stochastic projection with the different potential investment portfolios reflecting the appropriate level of volatility. That analysis would help show the likelihood of achieving different levels of results. While the median result with the 60% equity portfolio may be better than the median result with the 40% equity portfolio, it is almost certainly true that the downside risk is higher, too – the 60% equity portfolio would be more vulnerable to a catastrophic scenario that results in the rapid depletion of assets. If you ignore the risk, of course you’re always going to recommend the portfolio with more equity.

    Reply

    • Posted by Tough Love on March 29, 2018 at 1:09 pm

      In my opinion, it would be incredibly negligent if Aon Hewitt DIDN’T do their analysis in a manner similar to what you described, such approach being quite routine today.

      And they should SHOW IT for critical review.

      Reply

    • Posted by Stephen Douglas on March 29, 2018 at 1:34 pm

      Stochastic projections isn’t the big problem.

      “Of course, it’s based on a couple of pretty big assumptions: that investments won’t tank, and that the state makes good on its commitment to increase its yearly contributions to the fund and resists the decades-old habit of skimping when times are bad.”

      1) What are the odds… “the state makes good on its commitment to increase its yearly contributions to the fund and resists the decades-old habit of skimping when times are bad.”?

      2) Don’t worry about investments tanking. If “CA pension funds didn’t “lose money” in the Great Recession”, then NJ should be OK too.

      View story at Medium.com

      Reply

      • Posted by Brian on March 29, 2018 at 2:18 pm

        Crane’s analysis makes the very common mistake of treating a pension like an accumulation fund, a single amount invested and never touched. That is not the case though – every year, contributions are received and, more importantly, benefits are paid. You may not care about volatility with an accumulation fund, as the path does not matter, just the total return. But when you have to pay out benefits along the way, volatility matters a great deal. For example, CALPERS paid out more than $12 billion in benefits in 2009. That money went out the door, so those were assets that did not participate in the recovery from 2009 to present.

        Yes, the realized investment return and the ability/willingness of the sponsor to make required contributions are bigger concerns for the pension plan as a whole, but those things are outside the control of the actuary. The ability to take a good look at the risk is well within their control, though, which is why it is incumbent upon them to do so.

        Reply

      • Posted by Tough Love on March 29, 2018 at 2:18 pm

        The math behind DB pensions DEPENDS On the Plan MAKING the assumed investment return rate EVERY YEAR.

        Simply not LOSING money ….is not good enough. If you go for 5 years making nothing, you’re in deep doodoo.

        Reply

        • Posted by skip3house on March 29, 2018 at 3:00 pm

          Just call me ‘simple minded’ for believing NJ is in big Pension/Rx trouble because most all participants do not follow the involved logic?
          If participants/taxpayers could see and understand the progress/loss every so often, NJ would get out of this ‘unreal math’ quagmire and bend to the will of the citizens, instead of trying to come up with that pi value by squaring a circle…(until the 19th century.).

          Reply

  2. Posted by Anonymous on March 29, 2018 at 9:51 am

    Trump is President there’s no way the stock market is going down hahaha

    Reply

  3. Posted by skip3house on March 29, 2018 at 10:09 am

    Sure nice to believe a crystal ball? More reliable are benefits determined each period by actual funding results…interest, values, monies from Public Workers, and from our affordable/balanced NJ Budget.

    Reply

  4. Posted by NJ2AZ on March 29, 2018 at 3:22 pm

    “The consultant’s simulation assumes the state will hit the full actuarial recommended contribution in 2023 and won’t return to its old ways of underfunding.”

    I’m not quite sure that’s a realistic assumption

    Reply

    • Posted by Tough Love on March 29, 2018 at 3:36 pm

      I’m CERTAIN that it’s not a reasonable assumption.

      In fact, I’d bet the grade-in is AGAIN extended, likely with a lower starting percentage than the current percentage.

      Reply

      • Posted by NJ2AZ on March 29, 2018 at 9:05 pm

        does paying out the full amount when the funds are PAYGO status count as making the full ARC? because then we might see them hit their goal by 2024 :p

        Reply

        • Posted by Tough Love on March 29, 2018 at 10:17 pm

          Paygo will require $10 Billion in more taxes. Maybe THAT will wake up the Taxpayers to the financial “mugging” being perpetrated upon them by the insatiably greedy Public Sector Unions and our Elected Officials who have been BOUGHT by these Unions with BRIBES disguised as campaign contributions and election support.

          Reply

        • Posted by Stephen Douglas on March 29, 2018 at 10:48 pm

          Or, the Taxpayers may wonder why New York State workers have =better= pay and pensions, and pay =much= less for them.

          “States that have fallen behind on their pension obligations have been underfunding their pensions for years. Many have also used outdated investment forecasts that count on unrealistic returns.”

          “Eventually, those liabilities will have to be met. And the burden on individual taxpayers varies widely from one state to another.”

          https://www.cnbc.com/2017/10/18/state-pension-funds-continue-to-fall-behind-heres-how-much-you-owe.html

          Reply

          • Posted by Tough Love on March 30, 2018 at 12:09 am

            Quoting …………

            “Eventually, those liabilities will have to be met.”

            Or they won’t be met ……….

  5. Posted by NJ2AZ on March 30, 2018 at 12:45 am

    every time i read about these public pensions, the one thing that really just makes me shake my head is how ANYONE thought it was reasonable to think overtime pay should be factored into pensions.

    so absurd.

    Reply

    • Posted by Tough Love on March 30, 2018 at 1:04 am

      I’m pretty sure OT is NOT included in the calculation of Public Sector pensions in NJ.

      What amazes me is where some States/Cities allow themselves to be so hoodwinked/abused that they agree to include things like Uniform (or even Car) Allowances in pensionable compensation.

      Think about that……….

      Suppose the Uniform allowance is $1,000/yr and an employee retires with 30 years of service and a pension of 75% of final pay. That means that they will forever be getting $750 annually (COLA increased in most cases) supposedly for a Uniform that they won’t be needing once they are retired.

      Reply

      • Posted by NJ2AZ on March 30, 2018 at 12:27 pm

        OT is out in NJ for tier 29 (or whatever they are up to) employees i’m sure, but was that always the case?

        I was reading about NY (i believe) that mentioned guys boosting their pensionable salary with OT, but all the add-ons are absurd.

        Reply

        • Posted by skip3house on March 30, 2018 at 12:32 pm

          OT is/was true for NJ prison guards….recall older guards had first choice for OT, if due to retire ‘soon’.

          Reply

        • Posted by Tough Love on March 30, 2018 at 1:24 pm

          California’s Main Plan CalPERS had on their website the famous list all the misc types of pay that is includable in “pensionable compensation” …. colloquially known as the “99 ways to spike one’s pension”.

          CalPERS was so embarrassed by the absurdity of the nonsense that generated extra pay (MOST of which reasonable people would think as requirements of the job) adn the bad PR, that they took the list off their website.

          If anyone still has access to it, please post it, as it eye-opening as to the insatiable GREED of Public Sector Unisons/workers and how CA’s Elected Officials have been BOUGHT buy these Unions.

          Reply

          • FWIW

            https://www.scribd.com/document/237224021/State-and-local-government-supplemental-pay-categories

            These are allowed by CalPERS. The local jurisdiction has the final say in allowing or disallowing the pensionability.

          • Yours truly “benefitted” from this one…

            Special Class Driver’s License Pay –
            Compensation to school bus drivers or street maintenance employees who are required to obtain and maintain a special class driver’s license to perform their duties.

            “Street maintenance employees” had more intensive use of Class A and class B vehicles, so their Dept. negotiated a 5 percent increase in base salary when the federal government changed licensing requirements. (Circa 1999, as I recall)

            Our dept. had no class A and fewer class B vehicles, so rather than increase everyone’s pay, they opted to give special class pay (5 percent) only to those who acquired and used the license, about 10 percent of workers in the department.

            Was that greedy, or just a logical way to save money for unnecessary licensing?

          • Posted by Tough Love on March 30, 2018 at 2:42 pm

            Just grabbed the first one I saw …………. pathetic that they get EXTRA pay for this:

            “Administrative Secretary Premium –
            Compensation to an administrative secretary responsible for coordinating meetings, plans and other specialized activities for the governing body of the contracting agency or school employer. “

          • Posted by Tough Love on March 30, 2018 at 3:18 pm

            Here are a few more of the RIDICULOUS reasons for extra pay …….. let alone including them in pensionable compensation.

            Think about THAT ….. they will CONTINUE to be compensated EXTRA (via enhanced pensions) for things that they no longer do or are responsible for because they are RETIRED !
            —————————————————

            Marksmanship Pay –
            Compensation to local police officers, county peace officers and school police or security officers who meet an established criterion such as “certification” as a marksperson.

            Engineering Registration Premium –
            Compensation to engineers who have taken and passed a California engineering proficiency exam and are registered with the State of California.

            Government Agency Required Licenses –
            Compensation to employees receiving and maintaining a license required by government or regulatory agencies to perform their duties

            Mechanical Premium (Brake Adjustment License, SMOG Inspector License) –
            Compensation to employees who obtain and maintain state-required mechanical licenses.

            Accountant Premium –
            Compensation to rank and file employees who are routinely and consistently responsible for developing the employer’s budget.

            Asphalt Work Premium –
            Compensation to miscellaneous employees who are routinely and consistently assigned to mix, transport and/or apply a tar-like substance for sidewalks, roads, roofs and/or parking lots.

            Audio Visual Premium –
            Compensation to miscellaneous employees who are routinely and consistently responsible for operating audio visual equipment.

            Cement Finisher Premium –
            Compensation to miscellaneous employees who are routinely and consistently assigned to finish cement work, e.g. watering, brushing or surfacing.

            Circulation Librarian Premium –
            Compensation to library staff who are routinely and consistently assigned to the circulation desk of the library.

            Confidential Premium –
            Compensation to rank and file employees who are routinely and consistently assigned to sensitive positions requiring trust and discretion.

            Fire Inspector Premium –
            Compensation to “fire inspector” personnel who are routinely and consistently assigned to inspect buildings and other permanent structures for compliance with governmental safety standards.
            **************************************************************
            And ON and ON and ON……….. what a joke perpetrated upon the Taxpayers !

  6. Posted by Anonymous on March 30, 2018 at 7:58 am

    California’s Jerry Brown is arguing that public pensions aren’t ironclad. With Trump’s “tax cuts ” it’s going to eliminate the states ability to raise taxes to cover the pensions ,without that employees must contribute more to their own benefits packages and accept reduced pensions …sounds like a win for taxpayers ..

    Reply

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