Thursday, June 20, 2013


The Society of Actuaries (SOA) has created a “blue ribbon” panel that is charged with determining the causes of underfunding in public pension plans and making recommendations to plan trustees, legislators and plan advisors on how to improve plan management and strengthen plan funding going forward.  The panel is to seek input from public plan actuaries and other key constituencies, and to produce a draft report by the end of 2013.  Many are concerned with the SOA’s characterization of the issue, the make-up of the panel and the nature of the questions contained in a survey associated with the project.  NCTR intends to submit a survey response and is encouraging its members to do likewise; the deadline for responding is June 28th.  NCTR’s Executive Director, Meredith Williams, said “I think we must do everything that we can to prevent the SOA from publishing a report unfairly critical of the management of governmental plans and supportive of methodologies that we know will prove harmful to public plans, their participants, beneficiaries, and, ultimately, their sponsors.”

On April 17, 2013, the SOA announced that it had established a “multidisciplinary blue ribbon panel” to:
  • “Determine the causes, at a high level, of plan underfunding by considering how past decisions about benefit design, funding and investing have led to widespread and persistent underfunding of public sector plans;” and
  • “Develop recommendations for plan trustees, legislators and plan advisors on how to improve plan management and strengthen plan funding going forward.”
As announced, panel members include:
  1. Chair: Bob Stein, FSA, MAAA, Retired, Ernst & Young
  2. Co-Vice Chair: Andrew Biggs, American Enterprise Institute
  3. Co-Vice Chair: Douglas Elliott, Brookings Institution
  4. Bradley Belt, Palisades Capital Management, former executive director of the Pension Benefit Guaranty Corporation
  5. David Crane, Stanford University, former advisor to Gov. Arnold Schwarzenegger, CA
  6. Malcolm Hamilton, FSA, FCIA, Retired, Mercer, senior Fellow, C. D. Howe Institute
  7. Laurence Msall, The Civic Federation (Illinois)
  8. Mike Musuraca, Blue Wolf Capital Partners, former trustee of the NYC Employees Retirement Systems-NYCERS and formerly of American Federation of State, County and Municipal Employees
  9. Bob North, FSA, EA, MAAA, FCA, FSPA, New York City Office of the Actuary
  10. Richard Ravitch, Co-chair, State Budget Crisis Task Force, formerly Lt. Governor of New York
  11. Larry Zimpleman, FSA, MAAA, Principal Financial Group

As part of its effort to seek input from “key constituencies,” the panel has also created an on-line survey made up of 30 questions, most of which are open-ended.

NCTR is very concerned with the SOA’s project for several reasons:
  • Characterizing public sector plans as having “widespread and persistent underfunding” is a gross generalization of the situation.  “I do not agree with this statement, and I think that beginning a project based on this basic premise is very problematic,” says Williams. 
  • To NCTR’s knowledge, no public pension plan director was consulted regarding the panel’s make-up, and, as announced, no public plan director is a member. 
  • Several of the panel members, including its co-vice chair, Andrew Biggs with the American Enterprise Institute, and David Crane, former advisor to Governor Arnold Schwarzenegger of California, are well-known, vocal opponents of public sector defined benefit plans and staunch proponents of the use of the market value of liabilities (MVL) and a so-called “risk-free” rate of return.
  • Many of the panel’s survey questions are “very leading and appear to subsume a response, typically one that is critical of public plan management,” according to Mr. Williams.  In addition, of the 26 substantive questions, at least four deal directly with the discount rate, and several others implicate it.   “While the discount rate is certainly critical to funding issues, there are many other aspects to the funding challenge, and this emphasis on the use of the long-term rate of return on assets suggests to me a predisposition as to where this panel’s real focus lies,” says Williams.

 NCTR has prepared a survey response which stresses several key points:
  1. Judging the adequacy of funding requires more than a snapshot of the ratio of assets to liabilities at a specific moment in time.  The key issue is whether a plan sponsor has a funding plan and is sticking to it.  “Where challenges do exist for certain plans with regard to the adequacy of their funding, the primary cause,” according to NCTR’s survey response, “relates to the lack of funding discipline.”
  2. A pension funding policy should be based on an actuarially determined contribution.  It must include funding discipline to ensure that the funding policy contributions will be made, and it should strive to keep employer costs as a reasonably consistent percentage of payroll, in a manner consistent with the actuarial requirements.
  3. The strongest governance practice that those charged with reviewing or making decisions about plan benefit levels and contributions can establish to support the adequate funding of defined-benefit plans is to have a pension funding policy that is based on an actuarially determined contribution, and to fully and consistently fund this contribution. 
  4. The use of a long-term rate of return on plan assets is an appropriate discount rate to use for funding as well as financial disclosure because it is consistent with both the perpetual nature of governments and the enduring, long-term nature of public pensions.  Using a long-term approach in setting the return assumption also promotes stability and predictability of the cost of a pension system.  Finally, the purpose for measuring public pension liabilities is not to price them, but to fund them, and creating a disconnect between the measurement of a liability and the funding of that same liability would only serve to confuse the general public and elected officials. 
  5. If current taxpayers were charged on the basis of present interest rates, rather than a long-term expected rate, significant disparities in what generations of taxpayers are charged for pension benefits could occur.  This volatility would violate intergenerational equity by overcharging some taxpayers and undercharging others, depending upon the timing and direction of the volatility.   
  6. The Market Value of Liabilities (MVL) approach would produce rapid and erratic changes to a public plan’s normal costs, accrued liabilities, and funded levels, and the serious instabilities in the MVL measures would lead either to erratic demands on government resources or plan terminations.  
  7. All trustees, including elected officials and their appointees, have an undisputed fiduciary obligation to act for the exclusive benefit of the plan and its participants.  Trustees must put the interest of all plan participants and beneficiaries above their own interests or those of any third parties.  Continuing trustee education for all plan trustees, including those elected, appointed, or serving ex officio, should be expanded and consideration should be given to making such trustee education mandatory.
  8. The ability of a plan sponsor to fund a promised benefit is certainly a legitimate consideration, but the time to consider this is at the time the benefit itself is approved, or enhancements to it are adopted, and not when the actuarially determined contribution is being set.  

NCTR is asking its members to consider responding to the survey.  “Unless public pension plans respond, there is a real danger that only the views of proponents of a risk-free rate of return and the abandonment of the DB model will be heard,” according to Mr. Williams.

The Society of Actuaries is the largest professional actuarial organization with 22,000 actuarial members and the public in the United States, Canada and worldwide.  The SOA says its vision is for actuaries to be the leading professionals in the measurement and management of risk.