In response to a comment/question in a prior blog:
John, are you a part of any “screaming actuaries” groups? Are there such things? I recently sat through three finalist presentations as a citizen trustee for a municipal plan and it seemed like there were a dozen different actuary groups that these pension actuaries were in. Do any of them represent the ideas that Dr. Gold laid out of pushing for standards demanding more and explicitly considering role of serving the public?
I’m asking because I think that asking finalist candidates and the like whether they are a member of these groups would be a good practice as a fiduciary who is focused on my long-term responsibility to the fund. Or even to get them to put an answer in their response to the RFP to just get them to official state their stance.
And one more question – do you think it would be reasonable to make as a part of an RFP and then contract that they need to also publish the “disclosure of accrued benefits discounted by the Treasury yield curve – & the associated annual cost” that Dr. Gold mentions on slide 34? I think these are the “North/Rauh/Pepta numbers” that he mentioned, but I’m really not clear enough what these are to demand them. Does Dr. Gold publish a best practice valuation report showing what this would be?
which referenced this comment/question from Jeremy Gold:
and raised two seminal points worth exploring:
Jeremy Gold summed it up well in his presentation at the 2015 MIT Center for Finance and Policy Annual Conference:
In explaining why Rhode Island seems to have succeeded in reforming public pensions while Chicago, Illinois, and New Jersey remain mired in a morass of lawsuits and plummeting funding ratios Mary Williams Walsh called upon her inner-Baudelaire:
Ms. Raimondo, who started her battle as state treasurer, faced obstacles not unlike those confronting Mayor Rahm Emanuel of Chicago: entrenched political machinery, powerful unions, a decades-old practice of promising rich pensions without setting aside enough money to pay them, truculent taxpayers, record numbers of retirees and an all-enveloping fog of discredited numbers.
The upshot of the story is that the pension promises made in Rhode Island were not contractual so they could be changed by a legislature scared into action (which Central Falls did) but it was that last phrase, thrown out there and not explored, that hit home.
‘Uninvested’ by Bobby Monks despaired of the rise of Defined Contribution (DC) plans in the private sector while an issue paper out of the Manhattan Institute sees DC Plans as cost-effective. Both provide some interesting information (which I excerpt below) but both miss THE major point as to why Defined Benefit (DB) plans dominate in the public sector:
New Jersey Senate President Steve Sweeney proposed what he said was not a bailout for public pensions in this country. Rather the federal government will give to those other states who have deliberately underfunded their defined benefit plans $1 trillion so they can consider that money as an asset in determining what is euphemistically called their ‘Annual Required Contribution’ (ARC).
Among the warped thinking that would germinate such an absurd plan, by far the most dangerous is:
As if a federal bailout were a given for anyone feckless enough to need one.
Other disturbing aspects:
Mary Williams Walsh just reported that:
A judge in Chicago ruled on Friday that a plan to change city workers’ pensions was unconstitutional in a case being closely watched for its effect on the city’s uncertain finances.
The ruling, by Judge Rita M. Novak of the Cook County Circuit Court, is viewed as a setback to Mayor Rahm Emanuel’s efforts to rein in costs and rescue the city’s credit rating. Officials in the mayor’s office said the city would appeal.
“While we are disappointed by the trial court’s ruling, we have always recognized that this matter will ultimately be resolved by the Illinois Supreme Court,” said Chicago’s corporation counsel, Stephen Patton, in a statement. “We now look forward to having our arguments heard there.”
Last year, the city negotiated labor agreements to strengthen two of its pension plans, those for laborers and general municipal workers. The agreements called for reducing the cost-of-living increases that retirees receive each year, increasing workers’ mandatory contributions to the funds and strengthening the city’s pledge to step up its own contributions. In the past, the state Legislature has told Chicago what to contribute, and it has set the required amounts well below the actual cost of the pensions, putting the system into serious jeopardy.
Of the 31 unions whose members were to be affected by the changes, 28 had approved it. But the others sued.
How similar is this to the situation in New Jersey where we have seen:
I finished California Dreaming and the suggested solution for their public pension crisis is similar to what Christie is looking to push in New Jersey:
- Freeze the current Defined Benefit plans
- Set up 401(k) plans with profit sharing for everybody
- Use the savings to fund the massive shortfalls developed under the Defined Benefit system
My problem with that (in both states) comes down to:
- There won’t be any savings. Contributions for the current Defined Benefit system have been ridiculously understated (which is the main reason for the massive shortfalls that developed) so a Defined Contribution plan that provides substantially lower contributions would still cost about the same for governments;
- The transparency of Defined Contribution plans would make it a tough sell to public workers; and
- Private sector workers were fooled into accepting 401(k) plans in the 1980s and look where they are.
In any case it was a useful read and below are notable excerpts: