In a nutshell: some people were working on a paper regarding the valuation of public pensions, specifically, under the joint auspices of the American Academy of Actuaries and the Society of Actuaries. It became clear that the paper would not be published via the Academy process, the joint group was disbanded, and the authors were seeking alternative channels to publish.
I don’t want to get into those details right now, you can check my earlier posts.
Earlier in our series:
- Public Pensions Actuarial Valuations: Point-Counterpoint-DENIED!
- Followup on Actuarial Squabble
- Rock Em Sock Em Actuaries: How Much are Public Pensions Worth?
- Much Ado About Discount Rates: Illinois and the Actuaries
Oh no, it’s not over yet. August is over, but Labor Day is not yet over.
We’ve got a few more developments since my last post on this particular dispute.
OH NO THEY DIDN’T
Why didn’t the Academy publish the paper?
The paper mentioned in the op-ed was subject to the same robust policy and editorial review process we use with all of the Academy’s publications. A working draft was submitted by the task force for the initial round of review. None of our reviewers thought it was ready for prime time. Setting substance aside, it was poorly written, poorly organized, and difficult for nonspecialists to read. The tone was, in many places, more appropriate for an economic manifesto than an objective policy analysis. Upon receiving the first round of peer review comments, several members of the task force rejected the process and left the table. That made it impossible for the task force to bring the report up to the Academy’s standards.
You know, sitting silent was an option. Just a thought.
There’s more in the communication if you’d like to read it. I decided to excerpt the most inflammatory part. There are a few more items that are insulting, but that’s the worst part.
The highlighted sentence was … unwise. I wish I could say I was surprised. I wasn’t. I could explain, but I don’t want to right now.
In his latest missive, Tom Wildsmith describes the paper as poorly written and poorly organized. This is just another gratuitous insult that has no truth behind it. The paper is highly organized, progressing logically from the three sets of principles above through measurement of liabilities, financial reporting, funding, investing, benefit design and risk-sharing. Any disorganization perceived by Wildsmith must derive from efforts to placate the AAA reviewers. It is hard to tell whether or not Wildsmith actually read any version of the paper. When the latest version is eventually published, AOers can judge for themselves.
I look forward to reading the paper when it’s published.
YOU MUST HEW TO OUR THEORY
One way they could do so is to reject any ongoing effort like the one by the National Conference on Public Employee Retirement Systems. NCPERS is seeking to suppress any divergence from defined benefit plan orthodoxy, wanting to impose a form of control over service providers, including actuarial firms, and pension plan fiduciaries.
NCPERS last year adopted what it calls a code of conduct that’s more like a pledge of loyalty. It puts obstructions in the way of doing business with firms not approved by NCPERS.
To enforce its code, NCPERS created two lists. One is a list of the good guys that adopted the loyalty pledge. Segal Consulting, whose services include actuarial work, and Gabriel Roeder Smith & Co., an actuarial consulting firm, were among the first signatories of the NCPERS code, both signing in February.
The other list is composed of bad guys, as defined by NCPERS, to give pension plan fiduciaries “a way to screen service providers for practices that harm participants and beneficiaries.”
For actuaries and money managers and other service providers, signing the NCPERS code of conduct raises the question of how such observance squares with their own professional codes.
There will be more in days to come.
SAME AS IT EVER WAS
The NCPERS issue is not new. The first time I saw something related was in April 2009, as mentioned here:
from Montana rfp:
4.7 Market Value OF Liabilities (MVL)
Much has been written and discussed regarding the pros and cons of using market value of liabilities in the actuarial valuations of public defined benefit plans. Briefly state the position of the Primary Actuary and of the Actuarial Firm on this topic. Please submit any written documentation in which the position of the Primary Actuary or the Actuarial Firm has been stated. If the Primary Actuary or the Actuarial Firm supports MVL for public pension plans, their proposal may be disqualified from further consideration.
Originally Posted by P&I
Montana Public Employees’ Retirement Board and the Montana Teachers’ Retirement System, both of Helena, issued separate RFPs for actuarial consulting services, with both threatening to disqualify bidders if they support market valuation of pension liabilities.
Scott Miller, legal counsel of the public employees board, said …
Mr. Miller said, “We don’t want to pay for an actuary that believes market value (of liabilities) theory is appropriate for public plans. … The point (of that statement in the RFP) is we aren’t interested in bringing in an actuary to pressure the board to adopt market value of liabilities theory. “
Here’s a dilemma: You manage a public employee pension plan and your actuary tells you it is significantly underfunded. You don’t want to raise contributions. Cutting benefits is out of the question. To be honest, you’d really rather not even admit there’s a problem, lest taxpayers get upset.
What to do? For the administrators of two Montana pension plans, the answer is obvious: Get a new actuary. Or at least that’s the essence of the managers’ recent solicitations for actuarial services, which warn that actuaries who favor reporting the full market value of pension liabilities probably shouldn’t bother applying.
Public employee pension plans are plagued by overgenerous benefits, chronic underfunding, and now trillion dollar stock-market losses. Based on their preferred accounting methods — which discount future liabilities based on high but uncertain returns projected for investments — these plans are underfunded nationally by around $310 billion.
The numbers are worse using market valuation methods (the methods private-sector plans must use), which discount benefit liabilities at lower interest rates to reflect the chance that the expected returns won’t be realized. Using that method, University of Chicago economists Robert Novy-Marx and Joshua Rauh calculate that, even prior to the market collapse, public pensions were actually short by nearly $2 trillion. That’s nearly $87,000 per plan participant. With employee benefits guaranteed by law and sometimes even by state constitutions, it’s likely these gargantuan shortfalls will have to be borne by unsuspecting taxpayers.
Some public pension administrators have a strategy, though: Keep taxpayers unsuspecting. The Montana Public Employees’ Retirement Board and the Montana Teachers’ Retirement System declare in a recent solicitation for actuarial services that “If the Primary Actuary or the Actuarial Firm supports [market valuation] for public pension plans, their proposal may be disqualified from further consideration.”
Rather than repeating myself again, I will point you to the Fragility of Can’t Fail Thinking.
TO BE RATHER THAN TO SEEM
Someone responded to one of my recent posts on the discount rate drop in Illinois:
On the recent Illinois TRS decision to lower their discount rate to 7% I have to laugh at the headlines about the decision increasing costs 400M. I don’t understand why you don’t point out the decision doesn’t increase costs.
Yes, I didn’t mention that. Changing the valuation technique or assumptions changes how expensive the pensions look. The cash flows are whatever they’ll be… and the government will put in whatever contributions they put in.
But these balance sheet values… they’re only approximations. Changing how you make those approximations doesn’t actually change how much the pensions ultimately cost.
And making the pensions look cheaper doesn’t actually make them cheaper.
The reason I didn’t address that in that post is because I’ve got a back-to-school special for later this week. I’m so looking forward to it! (no, I’m not referring to the to-be-published paper. I don’t actually know when or how that’s going to get published.)
Rhode Island Pensions: Liability Trends
Kentucky Pension Liabilities: Trends in ERS, County, and Teachers Plans
Introducing this Week's State Pensions Example: Nevada