A timely topic
Kudos for the article on public plans (“The Future of Public Pension Plans,”
September/October). The interviews are
enlightening and insightful. They challenge actuaries to rethink their role in
society, particularly in light of the growing interest in longevity risk. Although
other disciplines understand it, Ken
Kent is on task in pointing out that it
is up to actuaries to quantify the concept for their public. Doing so includes
quantifying both the individual risk of
superannuation and societal risks as a
result of declining mortality.
Thanks for the interesting ar- ticle providing excerpts of
the panel discussion regard-
ing public-sector pension plans
(“The Future of Public Pension
Actuaries have much to offer by ex-
panding their communications to present
their wisdom, as James Rizzo points out.
Over the years, I have learned that there
exists a cosmological disparity between
accounting and actuarial think-ing. The retrospective view looks
for point values. Actuaries have
tended to accommodate and
conform to that view with point
values based upon accounting
thinking. As this article illustrates,
actuaries are responsible for communicating obligations as a range
of values (say 25 percent to 75 percent probabilities) based upon the
long term. This is true throughout
It’s poorly understood how the
life experience is really a risky adventure.
This is brought to light in Bob North’s discussion of defined benefit and defined
contribution models. The models allocate
risks differently between employer and
employee but also between generations
of employees and of taxpayers. Increasing life spans have brought the risk of
intergenerational equity to light. This
is a uniquely actuarial concept that the
profession needs to communicate to the
public. Whether it can be presented in a
palatable way remains to be seen.
thomas h . shelby III
EDITOR’SNOTE: OnMarch30,2011,atthe Academy’sinvitation,KenKent, aformerAcademyvicepresident forpensionissuesandapension actuarywithCheironin McLean,Va.,RobertNorth,chief actuaryfortheNewYorkCity RetirementSystem,andJames Rizzo,aconsultingactuary withGabrielRoederSmith& Co.inFortLauderdale,Fla., participatedinaspiritedround- tablediscussiononfunding publicpensionplans.That conversation,moderatedbyBill Connor,afreelancejournalist whoconductsmediatraining fortheAcademy,ranforseveral hours.Whatfollowsisanedited transcriptoftheirexchange.A videooftheentirediscussion isavailableontheAcademy’s website, www.actuary.org. The Future of Public Pension Plans We asked three pension actuaries to reflect on public-sector plans, considered by many to be the last best hope for eviving defined benefit pensions in this country. Here’s what they said. TheStateofPublicPensionSystemsin2011 JAMESRIZZO:Theeconomyisthelargestsubstantiveissuethat’s facingthesystems—notonlythemarketsrecoveringfrom’08and’09but alsogovernmentrevenuesourcesthathavebeenaffected.Governmentsare beingpressedfrombothsidesonthis. ROBERTNORTH:Publicplansinrecentyearshavebeensubjectto alotofmisunderstanding,demagoguery, andgenerallybadpress.Anda lotofthatreallyismisdirected.Contributorydefinedbenefit(DB)plans, whichmostpublicplansprovide,areoneofthebestdesignspossiblefor meetingtheneedsoflong-serviceworkforcesthataretypicalinthegov- ernmentsector.Aspeoplelookattherealities, publicplansdoagoodjob.Theycando better;therecanbemoretransparency,moredisclosure.Butingeneral, thereisnobettersystemfordeliveringretirementincometoattractagood, effectivepublic-sectorworkforce. KENKENT:Wecan’ttrivializethechallengeoffindingmoneytorecover marketlossesintheselarge,maturesystemsandalsofindingfundstoallow forrecoveryintheregionsthatthosegovernmentalsystemsoversee.The retirementsystemsweresetuptomitigatefinancialvolatility.Thislatest markethascausedthattobeexacerbated.Butthere’sbeenheighteneddis- cussionwiththepublicplansaboutreducingtheirrisks,andatthesame time, costsmaybebarelysustainableattheseelevatedlevels.Allwiththe goalofreducingtheprobabilityofcostsgoingfurtherup.Ithinkthatrisk reductionisgoingtobeacontinuingtrend. North,Rizzo,Kent,andConnor 18 CONTINGENCIES SEP|OCT. 11 WWW.CONTINGENCIES.ORG SEP|OCT. 11 CONTINGENCIES19
Contingencies). If actuaries are not central
in this discussion, I fear it is due to our
closed thinking and perceived conflicts
of interest that perpetuate the notion that
the “market value of liabilities” is interesting but not really relevant.
In setting expected return assumptions, actuaries use their judgment about
what an investment fund should be able
to earn over the next several decades.
uity among taxpayers is important
from both a fairness perspective and a
competitiveness perspective. A community or state must remain a competitive
place in which to do business or a desirable place to live. Decision makers
can best serve the government, public-sector employees, and the taxpayers by
understanding what could happen, not
just what the expectation is.
The panelists make numerous references to distortions resulting from the
current low interest rate environment.
Their discussion took place on March 31.
Take a look at how far and in what direction
interest rates have moved since then. The
panelists never seem to realize that they are
implicitly superimposing their own judgment about what a reasonable interest rate
or liability value is, over what just is!
I’m really grateful that taking risks
lowers expected plan costs. Let’s just
count our chickens after they hatch!
Correction: Robert North, a participant in the debate on public-sector plans in the
September/October Contingencies (“The Future of Public Pension Plans”), was identified
incorrectly as chief actuary for the New York City Retirement System. His correct title
is chief actuary for the New York City Retirement Systems, which includes five major
actuarially funded retirement systems.
re g a r d i n g M a r k Shemtob’s suggested product in his commentary (“Longevity
Investment Hedges: Monetizing Mortality,” July/August Contingencies), I would
point out that it is not great retirement
planning to have your income depend on
the mortality of a group of strangers.
Despite his perception of the conservatism and rapacity of annuity actuaries,
a guaranteed product relieves the individual of mortality and investment risks
that this proposal does not. I also believe this would be viewed as a tontine,
an approach which has been considered against public policy and banned
in many jurisdictions for quite some
time. A person’s return is increased because of the early mortality of
people with whom he shares no
other interest. What could go
wrong with that?
Shouldn’t that start with
where interest rates are
today, or where price/
earnings ratio (P/E) multiples are today? It seems
that if interest rates go back to higher
levels, then financial assets will appreciate more slowly than in the past. Or will
the P/E expansion that contributed to a
certain equity risk premium over recent
decades be able to continue? If you are
running a marathon, it matters whether
you start in a valley or on a mountaintop!
We need to be more open to the increased
rigor that other professions can contribute to our models, even when we don’t
want to accept what they are saying.
I sensed a vibe in the article that
taking investment risk will all work
out in the long run. Generational eq-