August 1, 2018

Can The Actuarial Profession Innovate? Another Look.....

“Suppressing views and research findings that raise serious questions about ‘accepted actuarial practices’ in the valuation of DB plans shines a defensive, reactive light on the profession. Surely the profession is better than that. Much work remains to be done to bring financial security to aging populations around the world. Actuaries must be part of the solution, not part of the problem.”


An Actuarial Cover-Up?

The trigger for the September 2016 Letter titled “Can the Actuarial Profession Innovate?” was a controversy involving the American Academy of Actuaries (AAA) and the Society of Actuaries (SOA) on one side, and a draft paper by members Ed Bartholomew and Jeremy Gold (BG) on the other. The paper effectively accused the profession of sanctifying actuarial practices that played a significant role in creating the financial difficulties that many US public sector and multi-employer DB pension plans find themselves in today. The controversy was widely covered in such publications as The Economist and The Wall Street Journal.

The essence of the BG argument was that accrued and accruing public sector and multiemployer pension promises were effectively debt issuance by the plan sponsors, and hence should be valued as such. Instead, accepted actuarial practices permit the use of the higher expected return on plan assets as the discount rate to value accrued and accruing pension promises. According the BG, this causes four problems:

  • The economic value of deferred compensation and hence total compensations costs for employees are understated.
  • Current employment costs are shifted to future generations.
  • Accrued pension liabilities are understated.
  • There is a false perception that pension benefit costs and liabilities can be reduced by taking on more investment risk.i

How serious a problem is all this? On the US public sector side, BG estimated $4T in pension assets and $5.5T in reported accrued liabilities. However, if those accrued liabilities were restated on a market value basis, the reported $5.5T liability almost doubles to $10T. AAA/SOA refused to publish the paper.ii

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