Blogging Employee Benefits

March 21, 2006

Where Did All the Actuaries Go?

Filed under: Legislation, Pensions — Fuguerre @ 5:21 pm

I chuckled last month when an actuarial buddy sent me to an article with the headline Shortage Of Actuaries May Stall Pension Reforms, resisting the urge to take it as a cue for legislative strategy. Lately, I’m not laughing. With pension civil war looming inside the Beltway, have all the pension actuaries out there gone AWOL?

Look, I’m not a numbers person myself. But frankly I don’t put a whole lot of stock in an Administration projection said to be warning “that the House and Senate bills would lower corporate contributions to the already underfinanced pension system by $140 billion to $160 billion in the next three years” (as cited in NYT 1/19/06). It hardly seems credible that reform strengthening measurement assumptions, tightening asset valuation rules, dropping amortization periods effectively to 3-5 years, and giving deficit reduction funding rules a booster shot would reduce the minimum funding requirement by as much as a third of what current rules would require. For the airline industry, perhaps, if that troubled sector were to succeed in lobbying for lengthy transition periods to get their pension plans flying again. But for the pension industry as a whole, I see nothing that leads me to believe that warning. And like I say, I’m no numbers person, but isn’t the Joint Committee on Taxation doubting that warning in its JCX-15-06 comparison of revenue effects under the proposed pension bills? Like, unless the pension tax preference just ain’t what it used to be, revenue effects that would peak at just over $5 billion in 2008 under the Senate version just don’t seem to reflect pension financing shortfalls on the order of the Administration’s 3-year tally of $150 billion.

Ditto the estimates of underfunding. Put off to the side for a minute the various reports of the jolt to shareholder equity threatened by FASB’s project, on the order of a third of a trillion for the S&P 500 before adjusting for taxes. A large piece of that comes from OPEBs, which are not the (direct) concern of the PBGC; while the lion’s share of the pension portion there will be to adjust for unrecognized net losses against overall prepaid costs as measured on the FAS 87 basis (not to mention, to reflect future salary increases) – huge, to be sure, but not anything remotely equivalent to “underfunding” of any concern to the PBGC. So where do we go to find the supposed underfunding of PBGC-guaranteed pension plans, that enormous canyon said to be near half a trillion deep? As in, that would mean that the average pension plan out there is only about 80% funded. Even with the most conservative termination-basis assumptions that perform contortionist time-shifts to immediate retirement at each individual’s most valuable moment, it’s still difficult to see where the numbers are coming from; and I’ve yet to have any of my own actuarial contacts sufficiently fill in the missing pieces for me.

But in my own private opinion, what is most scary is the silence I hear in the wake of discussion among far too many policy-makers, financial analysts, and the press that seem too easily to dismiss the actuarial principles of sound pension funding, sometimes in rather insulting and unprofessional terms. Why am I hearing no response? Sure, maybe I need to add a pension actuarial blog or two to my blogroll, if there exists such a rare animal. But it would sure please my ear to hear something more formal said in official forums, else I fear the legal, financial accounting, and investment world that will be bequeathed to us under this strange new version of actuarial truth we’re being taught.

Just one blogger’s opinion, but I worry that the relative absence of actuaries from the debate may be threatening our own pension reform.



  1. I can envision, after looking at what’s being proposed, minimum required contributions shrinking. The Target Normal Cost is just the actual cost of the accrued benefit earned during the year, not taking into account future salary increases that could relate to that year of service; this is referred to as the Accrued Benefit (Unit Credit) Actuarial Cost Method. At present, the IRS views the use of this funding method as “unreasonable” where benefits are related to salary. Contrast this with the FAS 87 calculations where the Service Cost under the disclosure is computed using Projected Unit Credit.


    Say you have a brand new plan with 1 person, age 25, no pre-participation service taken into account for benefit purposes. His salary in year 1 is $20,000, and the resultant accrued benefit is $400. For sake of argument, let’s just say the present value of that accrued benefit using their proposed CL assumptions is $568. Of course, we’re probably assuming that his salaries are going to increase along the way to age 65. For sake of argument, let’s say that we expect his Final Average Salary to end up at $65,000, and the projected accrued benefit would be $1,300, with a present value of $1,846! If one was using say Individual Aggregate, the Normal Cost would be $1,261.

    So to recap:

    Their Target Normal Cost is $568
    Traditional Individual Aggregate would be $1,261
    FAS Service Cost would be $1,846.

    The “Pay as You Go” funding philosophy never really pans out that great. This is what appears IRC 412 will end up at given both the House and Senate reforms

    Comment by Michael Wyatt — March 24, 2006 @ 2:11 pm

  2. Currently, pension plans are funded using an investment return assumption of 7% to 8% or so. The impact of this assumption is offset, for current employees, by a salary increase assumption of 4% to 6% or so, for the duration of employment. The proposals in Congress replace the investment return assumption with prevailing bond interest rates, and they effectively replace the salary increase assumption with 0%. Thus, if prevailing bond rates stay under 6%, the proposals will increase funding. If prevailing bond rates rise up above 7%, however, then the proposals will decrease funding. Some believe interest rates will stay low forever, and they believe these proposals will improve pension plan funding. Others believe interest rates will go up and down, as they have historically, and they believe the proposals will lead to contribution holidays, as interest rates rise, and pension plan terminations, as interest rates fall again. The proposals tie the funding rate and the lump sum interest rate together, so they will lead to plan terminations, where today we see plan freezes.

    I have written to the American Benefits Council, the American Society of Pension Professionals and Actuaries and the Society of Actuaries. Congress likely will ignore individual actuaries, but actuarial organizations might be able to make a little headway. Part of the pressure behind these proposals comes from the Pension Benefit Guaranty Corporation (PBGC). As bonds are peaking in price, and as stocks are down from their peak, the PBGC has been shifting from stocks into bonds, lowering its investment return assumption, complaining about being underfunded, and applying pressure in favor of pension reform.

    If the article you mention is right, at least we will be able to find work in Nigeria. Any comments expressed here are my professional opinion and not necessarily the opinion of my employer.

    Comment by Thomas M. Zavist, FSA, EA — March 24, 2006 @ 2:28 pm

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