Actuaries Explaining DB/DC Difference

At yesterday’s hearing on the solvency of the multiemployer retirement system Representative Phil Roe posed to an actuary a basic question that many non-actuaries would have:

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That did not entirely explain why Defined Benefit plans got so severely underfunded. There is a real answer but most actuaries will not voice it:


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It is the actuary who is supposed to set assumptions so that promised benefits can be paid. For multiemployer and public plans actuarial judgment has been compromised to provide the numbers (low numbers) that their clients are looking for. This is what has brought these plans to insolvency.

Had Representative Roe been able (or knowledgeable enough) to follow up on his basic point he may have gotten some response touching on unexpected market drops or unexpected increases in life expectancies. Those lame excuses should not be tolerated. Actuaries are in the business of predicting accurately. To be wrong (either on the high or low side) by a little is understandable. To be this wrong is only understandable if you see the actuarial profession, as currently constituted, as being the problem with Defined Benefit plans.

6 responses to this post.

  1. Posted by skip3house on April 20, 2018 at 6:04 pm

    “..the actuary .. is supposed to set assumptions so that promised benefits .. paid. For multiemployer/public plans actuarial judgment..compromised to provide.. (low numbers).. their clients are looking for. This.. brought these plans to insolvency.” @stateaidguy @NJSenatePres

    Reply

  2. Posted by Anonymous on April 21, 2018 at 6:49 am

    John, is there not one actuary in the whole country who can speak truthfully about the woeful underfunding and unsustainability of the pensions…….You write about it here and I’m sure there are others so why then is only one side of the actuarial assumptions takes as gospel?

    Seems to me, all information and data should be analyzed to determine best practice for continuing as is or significantly reforming the pensions.

    Reply

    • Actuaries not actually working on these plans have license to be honest:
      https://burypensions.wordpress.com/2015/10/06/screaming-actuaries/

      But to the extent that actuarial organizations are primarily concerned with their members’ profitability we won’t get much, if any, honest research.

      My main complaint is that there is nobody in the actuarial community looking at the need to assume a lower interest rate for funding when a plan is severely underfunded. It is something that actuaries can understand (ie. commutation functions) and should be explained to the general public. So far, I have seen nothing on it.

      On the other hand the American Academy of Actuaries did step up with their paper puncturing the 80% full-funding myth and, when I was going to ASPA conferences, there was a special session about 10 years ago that warned of the issues with public plans.

      Reply

      • Posted by Tough Love on April 21, 2018 at 2:13 pm

        My complaint is that the GASB caved in to pressures (from the Public Sector Plans, the Unions, the Plan actuaries, etc.) in their revised standards to ONLY require low discount rates for years BEYOND the year in which Plan assets run out, and with that latter test itself calculated using the high “official” Plan interest rates.

        Just because a Plan isn’t expected to run out of assets for 30, 40, 50 or more years (with the calculation of the run-out year itself done using very liberal assumptions) does NOT make it reasonable or appropriate for such Plans to discount (highly guaranteed) Plan liabilities at 7% to 8% for the decades BEFORE assets run out.

        Corporate-sponsored Private Sector Plan are required to discount Plan liabilities at MUCH lower rates (in the 3% to 4% range). The executives of these corporation aren’t stupid, and accept those rates because they know that they ARE reasonable and appropriate, and with legions of lobbyists, would certainly put a up a good fight if they believed otherwise …. which they have NOT done.

        What seems obvious to me is that if Public Sector DB Plans HAD to use the same rates required of Private Sector Plans, 50% to 75% of all such Plans would immediately be insolvent and would have only 2 choices; (a) freeze the Plans and for many, reduce Past service accruals, and/or (b) increase taxes by a HUGE amount. Neither being POLITICALLY acceptable, the GASB simply caved in to the will of those who benefit from the status quo.

        Reply

  3. […] understand the real problem I would urge you to follow up on Representative Roe’s question on the differences between Defined Contribution and Defined Benefit funding and how the latter got […]

    Reply

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