game. Keeping what is good is a priority on the part of most of
the labor organizations. Simultaneously, I think there is a recognition by all parties that if something is no longer sustainable,
changes ought to be developed.
People are living longer; people are expecting to work longer. Those trends are independent of the private sector or the
public sector. And the public sector cannot ignore these in designing its remuneration packages. That can create pension
envy that could lead to more radical decisions, such as going
to DC plans.
That said, in the end I believe that the DB versus DC debate
in the public sector is not one of benefits. It’s more one of governance. If you go to a DC plan, you commit to put in X dollars per
year, and there’s not much a politician can do to burden future
taxpayers by what he does that year. With a DB plan, a benefit
improvement in one year that increases past service benefits for
employees is something that may not be paid for until the next
administration and beyond by future taxpayers.
If people had confidence in the governance of DB plans in
the public sector, with no inappropriate or excessive commitments that leave future taxpayers on the hook, I believe a lot of
this debate would go away.
RIZZO: As a societal goal, I think our country needs to preserve
DB plans, and public-sector DB plans are positioned well to
serve that goal. If we can work together to achieve stability and
sustainability of pension funds, particularly public sector, I think
we would pass to our next generation a worthy security for the
retirement years.
Portfolio Allocation
RIZZO: Since 2008 there’s not been much movement away from
domestic and international equities, unless it’s a slight shift toward real estate and alternatives—hedge funds or private equity.
Pension funds have stayed the course and not changed their asset allocation very much.
KEN T: I’ve seen similar trends. Public pensions still have the
same level of funds dedicated to equities, but have been diversifying within those classes. They continue to rebalance as one
sector outperforms another.
NOR TH: You really only have two choices when you’re putting
money into a pension plan, private or public, in terms of your
goals and objectives. You go into equity-like securities in order
to participate in the growth of the economy with growth-related
and risk-related assets. Alternatively, you invest in fixed-income
instruments, such as bonds, which you can use to defease your
liabilities. On a matching basis, you can offset the payments you
expect to make over the next few or several years.
A combination of these represents a good diversified port-
folio, and many public plans, primarily because of their size,
have a tremendous advantage over both individuals and many
smaller private-sector and even smaller public-sector plans.
The large public plans can invest in long-term projects—infra-
structure, private equity, various alternative investments. They
can invest in 2007 in something that won’t pay off until 2013.
And when the market bottoms out as it did in 2009, they’re not
pressured to sell at a tremendous loss.
The Challenges and Rewards
of Working as a Public-Sector Actuary
KEN T: You’re dealing with a diverse group of people. Whether
they’re representatives of labor, management, or concerned
citizens, they’re focused on the retirement system. They have
diverse objectives, and there is a challenge in meeting their need
for information and to help them make very difficult decisions.
Often the public is in the room when you’re reporting. And it
teaches a very different discipline to stay objective, to provide
unbiased information in a meaningful way so that this group of
people can understand the risks that they’re dealing with and
formulate the right decisions.
RIZZO: I’ve done work in both sectors, and I prefer the public
sector. It’s a lot more open and transparent. I think it makes us
better consultants because of the dynamics of all the different
stakeholders and the spotlight that’s on us.
We also have a measure of freedom in the public sector to
ply our trade, to solve problems for our clients, without the arcane restrictions that the federal regulations require.
And public-sector pension plans are genuine retirement
plans. They’re not cash accumulation and severance plans like
DC plans are. These really are retirement plans that serve a
social good, and that has a sense of reward to it.
NOR TH: I feel like they’re my 700,000 participants. I try to do
the best possible actuarial work to help the retirement systems
and the city provide for the retirees and beneficiaries in a way
that generations of taxpayers get the best allocation of costs over
time that I can devise. It’s a great responsibility, but the reward
is equally great.
KEN T: I think what’s important to appreciate is that public plan
sponsors and the boards that run these systems have been very
responsible in addressing the financial crisis that many of the
systems have gone through. And actuaries have been providing
them with information to make intelligent decisions.
This article reflects the opinions of the participants and does not necessarily
reflect the views of their employers or their clients. Nor does it reflect the official
policy of the American Academy of Actuaries, or any of its boards or committees,
or the opinions of the Academy’s individual officers, members, or staff.
