The Future of Public Pension Plans
NOR TH: There are studies being done to show where things
stand. I disagree with many of those studies and the way they
emphasize the current status of plans, which when interest
rates are low and the stock market is down, does look quite
bad. The bigger question to me is what are people doing
about it? Most public plans and their officials are responsibly
trying to address the issues before them and meet the
challenges created by the economic conditions.
RIZZO: I think some plans have benefits that are too generous.
Rolling back some of the benefits to previous levels for future
years of service is something a lot of governments are looking
at. At the same time, some governments are not contributing
a sound actuarial level of contributions to maintain viability.
If they were to set a level of actuarial contributions at least as
high a priority as servicing the debt, I think they would go a
long way toward financing pension promises in an adequate
way. Finally, governments and plans could do a better job of
A lot of it has to do with how the unfunded accrued liability
in these pension plans is paid off. If we keep kicking the can
down the road to a future generation, we’re not doing either
generation a service. If the unfunded accrued liabilities are financed over a shorter period of time than they are now, I think
we would go a long way to securing the benefits—although it
takes more money to do that.
Transparency and Public Information
KEN T: There are lots of reports and papers that provide varied
benchmarks of the outstanding obligations of public retirement
systems across the country. But the costs being determined by
actuaries for these systems—taking into account investment returns—are what the taxpayer should be focused on rather than
the different ways to measure this liability. It is the actuarially
determined cost that defines the resources that are currently
needed to fund the plans.
RIZZO: Don’t believe everything that appears in the news. Any
taxpayer can go to the local government website and pull up the
annual financial statement. It contains a wealth of information.
The whole budget process is transparent. Taxpayers ought to
be paying attention to where their money is being spent, and
they’ve got access to that.
NOR TH: It doesn’t hurt to start with your city’s budget and look
and see where pensions fit in. But pensions are just part of a
larger set of information. Sanitation members, policemen, firemen, teachers all receive base pay, pensions, medical, and other
fringe benefits. If you look at the budget in almost any city, you
can see where pensions are as a percentage of compensation.
I think it’s important to understand that many public workers
entered government service because it offered them a chance to
contribute to society and a pension that would be secure.
In addition, governing is all about choosing and having priorities, and I’m not aware of anyone running on a platform of
increased contributions to the pension funds. There are a lot
of other worthy causes, and most public plan sponsors would
ideally like to see how they can provide a secure retirement at
the lowest reasonable cost.
There’s always a challenge in the governance process, in
which you have people elected for relatively short periods of
time making decisions on very long-term issues. And sometimes
in the past, it hasn’t been uncommon for commitments—that
would be paid for later—to be undertaken in the near term.
KEN T: It’s important for both the public and other actuaries to
understand that the actuarial profession has been doing a good
job—a great job, actually—in educating and assisting the boards
of trustees and public employers through this crisis. I think it’s
important for actuaries who don’t serve in the area to know that
the job is being done well.
The Actuary’s Role
KEN T: One of the challenges that we have—whether we’re dealing with public systems, each of which has its own rules, or with
private systems that have a single set of rules—is to talk to our
clients about the nature of the risks in the system and determine
whether they can afford those risks.
For the large public systems that have significant under-funding, taxpayers are bearing a risk that they may not be able
to afford. They may choose where they live subject to the taxes
they may be called upon to pay. Just as many corporations no
longer feel they’re in a position to bear that risk, many public systems are looking at ways to restructure their programs
to share more of that risk with the participants of those systems and to mitigate, to some degree, how much gets borne
RIZZO: The actuary advises, and the elected officials and the
other fiduciaries are the ones who make the decisions. Sometimes we don’t get to advise them on matters that they need to
hear. Or when we advise them, they don’t take our advice. The
boards should turn to actuaries for advice on risk management—
not only of investments but also of the governance process. Risk
is one of the areas in which we work best: measuring risk, mitigating risk, and managing risk.
Another area in which actuaries can contribute is who
should share investment risk. I think there are some interesting plan designs that share the risk of a DB plan between the
employee and the employer. In the traditional defined contribution (DC) plan the employee bears all the investment risk, and
in the traditional DB plan the employer bears all the investment
risk. But there are hybrid and other models that have variable
benefit formulas that share the risk. That’s an area that needs