EA18 (6) Ethics of Contingencies

The second general session was on ethics:

In this highly interactive session, panelists and audience members debate solutions to difficult ethical situations faced by actuaries in their day-to-day practices, including transitions from one actuary to another, conflicts of interest, disagreements among actuaries, billing problems, and working with difficult clients.

The format was to present unethical case studies and have everyone agree they were unethical. Number 3 however, though suitably disguised, may have hit a little close to home for one-third of the attendees:

Small-firm actuary approaches large-plan sponsor offering to reduce their PBGC premiums by using a different set of assumptions. In return the small-firm actuary would get 20% of the premium savings.

I saw no need for villainizing small-firm actuaries and the example of manipulating PBGC premiums is a stretch as the PBGC has fairly straightforward rules on their variable rate premium calculations. But, substitute Annual Required Contributions for PBGC premiums and shift the venue to public plans and you have a real issue.

Which was my comment (first part from memory since no recording allowed) plus what I would have said (second part) if I had thought of it at the time:

I have a real problem with the contingency fee and wonder if they put it in writing. However the example of gaming PBGC premiums is a bit stilted and a real world example would be an actuary coming in and offering to reduce contributions for a public plan by using a different set of assumptions. This would not only be unethical but could get the actuary sued by participants. (Now the part I did not say but wish I did.) In New Jersey we had judges suing when their employee contributions, along with every other participant’s at other levels, were raised from 3%-of-pay to something like 3.1%-of-pay – still a bargain but not quite as much. These judges are in the JRS which is supposed to be depleted by 2021. Imagine what they will do when their checks stop coming. And if they find that an actuary was hired on a contingency basis to reduce contributions they will likely have a lawsuit that public employees can win, even in New Jersey.

Another commenter picked up on this and broached the Montana RFP but that was deemed to be beyond the issue at hand. A panelist made these points in summing up:

  1. The actuarial assumptions could NOT be the actuary’s best estimate since the actuary’s income would be based on the assumptions chosen, and
  2. Game theory of choosing actuaries. If 7 our 8 actuaries get the bigger number and you pick the one who gets the smaller, and likely wrong, number.

The panelist, a lawyer, went on saying he does not charge contingency fees in his practice though most lawyers do and “in my experience actuaries are much more ethical than lawyers and I would like to continue to say that.”

One response to this post.

  1. Posted by Analyst on April 12, 2018 at 10:19 am

    Try this question :

    Why don’t actuaries release their 30 year annual projections of contributions and payments . This would produce full transparency and allow other analysts to review impact of these figures. It seems that they only provide the PV of the liabilities .#actuarialtransparency

    Reply

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