STUMP » Articles » Public Pensions Practice: Where are the Screaming Actuaries? » 29 September 2015, 22:27

A very good question — and some answers — from Jeremy Gold.

But mostly – a call for action. For the non-actuaries. To get us actuaries to actually do something.

This is a presentation given by Jeremy Gold at the 2nd Annual CFP Conference at MIT:

For those who aren’t much for watching videos, I’ve transcribed some of his remarks, along with their time stamps in the video. While the video is listed as being 40 minutes long, Jeremy’s talk itself is only 20 minutes. His slides are here. I will be drawing from his talk.

I recommend all those interested in public pensions to watch it. That means: anybody who has close friends or family receiving, or hoping to receive, a public pension; politicians/trustees in charge of plans; taxpayers.

That might leave behind a bit of the blog-reading public, but I doubt it.

ACTUARIAL WAR: DIPLOMACY BY OTHER MEANS

I want to highlight some things Jeremy Gold said in his talk.

Let’s go with the opener:

[1:19]I’m here to tell you a story about how a profession failed to fulfill duty to the public and thus aided and abetted the very real crisis in public pension plans.
…..
[2:00]What we have here is a knowledge problem and a governance problem. The knowledge problem: actuaries shamelessly, although often in good faith, understate the value of future pension payments by as much as 50%.

Their clients want them to.

The governance problem: actuarial standards of practice allow actuaries to cater to their clients, while ignoring potential harm to third parties.

[3:10]Those [actuarial] standards have not prevented, nor even warned the public, about the pension crisis.

Why were Detroit’s pension liabilities such a surprise?
……
[3:30] I’m faulting leaders and institutions here, not individual practicing actuaries.

[6:30]North Carolina, South Dakota, and a few other states appear to be 100% funded. But remember, we’re in the 7th year of a bull market, and they’re using rosy actuarial assumptions.

Actuarial methods and assumptions continue to kick the can down the road and suppress true pension costs.

In spite of this, or in light of this, or perhaps because of this, the actuarial profession remains sanguine. Many of its practitioners seem unconcerned.

AN INSIDE/OUTSIDE VIEW

Don’t think the public pension actuaries are willing to admit they are doing it wrong. I have found extremely few of them agree with Jeremy (Bob North is one of the few… and he retired from being chief actuary of NYC.)

Those of us in annuities have no issue with Jeremy’s point of view, because this is how we’ve been doing valuation for a long time. Private pension actuaries (and Jeremy is one such) have had less of an issue over time, because they’re being forced to take this tack, but there still are lots of private pension actuaries who think that discounting at expected rate of return on assets makes any kind of sense with regards to stakeholder protection.

Here is a problem: it is difficult to get the actuarial community to do much about it. The public pension actuaries just want to do their jobs, and they don’t want to lose clients because they stick up for a standard that the profession doesn’t require.

(yet)

There is Bob North, as mentioned earlier (and in Jeremy Gold’s thank you slide), but he is a special case. There’s not many like him out there. Some of the ones I knew who were disgusted just left the profession to do something else entirely.

The private pension actuaries… well, Jeremy Gold is one such. A few of them shake their heads and move on. They’ve got so many more regulations to deal with, alongside the fact they’re in a dying field as regulatory change makes companies realize just how expensive those promises they made.

Because unlike governments, companies can’t simply dictate revenues.

(Oh, governments can’t really do that, either… but they’ve got a monopoly on taxation power, so that helps.)

Most actuaries have trouble enough in their own working lives,. Insurance actuaries have regulators and auditors poking into their work all the time, and it is pretty exasperating to think we have to think through the minutiae of our own specialties (my background is annuities, but I have worked on life insurance, reinsurance, and investments)… we gotta learn what level percent EAN means? (btw, I would have to look that up.)

Most non-public pension actuaries don’t feel like poking their nose into what is considered “other people’s business”

NOT MY BUSINESS?

Except public pensions, by definition, is everybody’s business.

But when it’s everybody’s business, then nobody is responsible.

This is why I don’t sit around waiting for “the profession” to do something. Jeremy has been poking “the profession” with a cattle prod for years and we are still where we were on public pension practice. He has been working on the inside — making multiple presentations, monographs, articles, open letters…. My own effort is more on the outside, trying to gather together information, find outside allies, and specially spread the information around to everybody. Obviously, there are lots of other individual actuaries who have been doing their own kinds of things, and the actuarial societies have even done their own studies.

We have yet to see change, though.

COMPETING INTERESTS

Back to the video transcript:

[9:00] Actuaries compete to provide services to public pension plans. Our code of conduct outlines various duties we have to those who pay for our services.

Actuaries keep contributions low. And although discount rates are the most visible tool for keeping contributions low, there are other internals in actuarial models which tend to lean in the same direction.

Low current contributions cater to current taxpayers but burden future generations with great risks and unacknowledged costs.

The profession rather than the individual actuaries and firms has the primary duty to protect third parties from overzealous catering to clients.

Jeremy goes on to talk about Actuarial Standards of Practice, how we do standards-setting in the U.S., and contrasting that to what the accountants do with FASB.

NEED FOR STANDARDS TO REQUIRE BEST PRACTICE

One of the biggest issues has to do with how you don’t have the normal feedback loop with public pensions that you have with every other area of actuarial practice. I mentioned it earlier: regulators.

In every other field, actuaries who do the valuation of liabilities have others who are looking over the work, and disputing questionable practices. In this thread at the Actuarial Outpost, I make allusion to a regulatory blow-up that occurred over some “creative” reserving in life insurance for specific products. I understand there was some heated conversation, and after some expedited revision of an Actuarial Guideline, changes were made to forbid that particular practice.

I have done work with regulators before, on working groups with the American Academy of Actuaries, and yes there is a lot of argument. There’s a lot of hashing out between what is practicable for actuaries to do and what the regulators want. There has been quite the step up in practices in many areas, especially with variable annuities and risk management.

But the point is that the regulators don’t work for the insurers that the insurance actuaries work for. Yes, one can get regulatory capture, but I haven’t seen it happen too often in insurance.

ARE THERE WATCHMEN? A WATCHMAN?

But in public pensions….? I would say who watches the watchmen, except I want to know who the putative first watchmen are.

Back to Jeremy Gold’s talk:

[11:50] Actuarial methods and assumptions are often dictated by state legislatures and/or plan trustees.

Actuaries sometimes argue that this absolves them of responsibility for outcomes. But no one increases benefits or chooses actuarial assumptions without consulting their actuaries. [I disagree, but we’ll move on]

Although I agree elected officials in Illinois and New Jersey bear a great deal of responsibility for the crises over which they presided, I want to know:

Where are the screaming actuaries…yelling in these burning theaters

Have actuaries been willfully ignorant?

Is their silence a required duty to their clients?

What about the profession’s duty to the public?

Is the actuarial profession missing in action?

Jeremy goes on to talk about what the main actuarial organizations in the U.S. do, and mentions the Actuarial Standards Board specifically.

There was a hearing by the ASB this summer after a call for response letters about a year ago.

Here are related posts: [in chronological order]

• July 2014: Public Pensions Watch: Tell the Actuaries What You Want To Know
• November 2014:Public Pensions Watch: Tell The Actuaries What You Need to Know
• December 2014: Requesting a Public Hearing on Public Pension Actuarial Practice
• June 2015: Public Pensions: Go Tell the Actuaries

I did attend the hearing in July and took extensive notes. It’s taking me a long time to digest that stuff (remember: I’m not a pension actuary, much less a public pension one — there was a lot of unfamiliar terminology for me)

But you don’t have to wait for my notes. You can listen to the speakers here.

ACTUARIAL STANDARDS OF PRACTICE

[15:10] [ASOPs] are brief, defer frequently to professional judgment, and they assert that they define appropriate practice rather than best practice.

I went on the internet and checked it out — you’ll be happy to know that air traffic controllers are required to follow established best practices.

Don’t let the actuaries fly your plane.
……
[16:10] Despite the ASB’s assertion that ASOPs [Actuarial Standards of Practice are principles-based, they’re neither principles-based nor prescriptive. This is just the opposite of FASB’s formulation.

In many cases, the only required action for the practicing actuary is to consider something.

Okay, I considered that.

I complied.

Next!
……
[17:10] Here’s a question: why didn’t Detroit’s pension actuaries warn that the plans were in dire straits?

Answer: they didn’t have to.

I want to note: I do not adjust any of the actuarial reports that I get a hold of to do my visualizations and analyses. I use the numbers as given, and at most do a little addition, subtraction, multiplication or division. I have a few posts waiting in the dock where I have messed with the numbers.

Even using the “rosy” official numbers, many of these plans look really bad. Some plans supposedly have 100% contributions, and yet are far from 100% funded. That doesn’t sound right.

Of course, if the assumptions are off, it’s not very surprising.

CALL TO ACTION

So here’s the big so what.

Various actuarial groups have made their own white papers, Blue Ribbon panels, and issue pages. They’ve had talks and hearings.

Here’s something to hang your hat on: the next meeting of the ASB is in December. Here’s a succinct notice.

Interested parties who did not respond to their prior calls for responses could still contact them (I do recommend reading the letters and watching the statements — the official email address is asb@actuary.org.

Here are Jeremy’s own calls to action:

Share the message. Promote Jeremy’s video. Contact the ASB, your local pension board.

It is your business, and waiting for someone else to rescue you is not the American way.

Hop to it!