The Milliman report criticizing assumptions used by Detroit’s erstwhile actuaries Gabriel Roeder Smith & Company (GRS), whose reports showed Detroit’s plans to be among the healthier public plans in the nation, kicked off with a scathing indictment of mortality assumptions used by GRS which Milliman characterizes as too ‘optimistic’.
You tell a layman that mortality assumptions are ‘optimistic’ and the assumption would be that people are living longer but in the perverted world of public pension funding an optimistic assumption (and they’re all optimistic) is one that lowers costs and having retirees die sooner is good news. Having all 20,000 Detroit retirees contract the plague would, in the world of big benefits and low costs, be cause for unbridled celebration by all concerned (except of course the 20,000 decedents).
Quoting from the Milliman report:
While we have not received experience data to perform any tabulation, the assumptions indicate to us that the mortality rates of Detroit public employees are significantly worse than national averages. While it is possible that the current assumptions are appropriate, as a VRPG for item D in the table above, the liability has been increased by 10% as an adjustment to reflect unbiased mortality rates.
In general for all actuarial assumptions, the more optimistic the current assumption is, the higher the likelihood that the assumption will not be met, leading to higher costs later as actuarial losses accumulate.
The mortality assumption used by GRS in their June 30, 2011 General Retirement System report (page E-1) that Milliman found so objectionable:
The mortality table used to measure retired life mortality was 110% of the RP-2000 Combined Table for males and 110% of the RP-2000 Combined Table set back 2 years for females. These tables provide a margin for mortality improvements of approximately 15%.
The mortality assumption used by Milliman in their June 30, 2012 valuation of the New Jersey Teachers’ Pension and Annuity Fund (page 61):
Rates of mortality vary by age, gender and type of retirement. A generational approach is applied using Scale AA to apply for future mortality improvement for non-disabled annuitants. The base year is 2000 for males and 2003 for females.
Notice much difference? What if you do a VRPG of the retiree populations in each report.
In the Detroit General Retirement System there are 11,555 retirees getting $219 million in annual payouts which GRS values at $1.984 billion which comes out to an average annuity factor of 9.06.
In the New Jersey Teachers Pension and Annuity Fund there are 89,308 retirees getting $3.46 billion which Milliman values at $32.4 billion which comes out to an average annuity factor of 9.36.
Bumping up that GRS factor by 10% would bring it to 9.97, far above what Milliman actuaries are assuming for at least one public plan in their regular day jobs.