Actuarial Punishment - LAPERS Louisiana Association of Public

Report
Actuarial Punishment
Bradley R. Heinrichs, FSA, EA, MAAA
CEO
1
Actuarial House of Pain Agenda
• “I hear voices!!”
• “The painful, not-so-great GASB”
• “I see dead people!! But maybe not as many
as before!!”
2
“I hear voices!! Where are they coming from?”
The Alphabet Soup of Actuarial Organizations
• SOA – Society of Actuaries
– Pension Section but no public pension specific section
– www.soa.org
• AAA – American Academy of Actuaries
– Public Plan Interest Group
– www.actuary.org
• CCA – Conference of Consulting Actuaries
– Public Plans Community
– www.ccactuaries.org
• ASB – Actuarial Standards Board
– 9 members appointed by leadership of other organizations
– Establishes and maintains actuarial standards of practice (ASOPs)
– www.actuarialstandardsboard.org
3
“I hear voices!! Where are they coming from?”
Recent Publications
The American Academy of Actuaries (AAA) - Feb 2014
Issue Brief on Public Plan Funding
Society of Actuaries (SOA) - Feb 2014:
Report of the Blue Ribbon Panel on Public Pension Plan Funding
The Government Finance Officers Association (GFOA) - Mar 2013
Core Elements of a Funding Policy
The Conference of Consulting Actuaries (CCA) - Feb 2014
Actuarial Funding Policies and Practices for Public Pension and OPEB Plans
(Discussion Draft)
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American Academy of Actuaries
Issue Brief: Objectives and Principles for Funding Public
Sector Pension Plans
Key Points:
Funding policies should be developed to maintain an appropriate balance
among competing objectives:
1. benefit security
2. generational equity
3. contribution stability
Policymakers should communicate how these objectives have been balanced,
and how, when and whether or not all of the identified costs are expected to
be met via the contribution allocation procedure
5
Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan Funding
• Commissioned by the SOA to develop recommendations for strengthening
public plan funding
• Composed of mostly non-actuaries, and included only one actuary currently
practicing in the public sector
Final recommendations were supposedly based on survey responses from
public plan actuaries and organizations representing public plans, personal
meetings with actuaries, members of the Actuarial Standards Board,
economists, an investment advisor, plan administrators, public sector pension
plan organizations, a rating agency, trustees, and unions.
6
Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan Funding
• Report identifies same three (3) principles that the American Academy of Actuaries did in
their “brief”:



Adequacy –
– Strive to fund 100% of the obligation for benefits
– Assumptions should be consistent with median expectations about future economic
conditions
– Assets should be adequate to fund benefits over a broad range of expected future
economic outcomes
Intergenerational Equity –
– Align the cost of services with the taxpayers who benefit from those services
Cost Stability and Predictability –
– Important for funding and budgeting
• Difference is that Blue Ribbon Panel opined that benefit security and intergenerational
equity is more important and takes precedence over contribution stability!!!
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Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan
Funding
Risk Measures Analysis and Disclosures
 Recommend increased disclosures regarding the expected future position
of the trust and of the nature and extent of risks facing public plans. The
Panel urges the Actuarial Standards Board to require the following
disclosures:
– Trends in financial and demographic measures
– Measures of risk to the plan’s financial position
– Stress testing
– Undiscounted cash flows
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Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan
Funding
Risk Measures Analysis and Disclosures
 Trends in financial and demographic measures – 10 year history of the
ratio of the following measures to payroll: benefits, liabilities, assets,
contributions, and recommended contributions, including a comparison of
actual to required contributions
 Measures of risk to the plan’s financial position – Disclosure of the
Expected standard deviation of investment returns
 The plan liability and normal cost at the risk-free rate, and
 A standardized plan contribution for assessing the aggregate risks to the
adequacy of the recommended contribution
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Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan
Funding
Risk Measures Analysis and Disclosures
 Stress testing – Disclosure of 30 year financial projections using returns at
+/- 3% of current baseline assumptions and only 80% of recommended
contribution is actually contributed.

Undiscounted cash flows –Benefit projections for current employees
based on benefits earned to date and on projected future earned benefits.
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Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan
Funding
Role of the actuary
 Discount rates – Should be developed using forward-looking techniques
based on 20-30 year return expectations. Should be based on expected
geometric, rather than arithmetic, returns with a 50% probability of being
achieved (no expected bias)
 Amortization periods – Should be no longer than 15-20 years.
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Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan
Funding
Role of the actuary
 Asset Smoothing period - Should be limited to five years or less.
 Consider using direct rate contribution smoothing methods – Determine
contributions based on a smoother contribution pattern to facilitate
budgeting rather than traditional cost methods, asset smoothing methods,
and amortization of UAL currently used by most plans, including LASERS.
The Panel admits this would require considerable discipline.
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Society of Actuaries
Report of the Blue Ribbon Panel on Public Pension Plan
Funding
Plan Governance
The Panel views plan governance as how plan trustees and the entities
responsible for plan funding and investments make and implement decisions.
The recommendations, as outlined below, focus on ensuring that funding is
sustainable.
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SOA Blue Ribbon Panel
Plan Governance
 The Panel recommends that governance structures should:
– Maximize the likelihood that funding objectives, including
intergenerational equity, are achieved
– Ensure trustees have sufficient information to analyze risk, including
establishing the guidelines for the amount of risk that can be
appropriately assumed
– Sufficient trustee education/training
– Careful consideration of plan changes, such as requiring changes be
completed over two legislative sessions or equivalent and include a
formal process of evaluating impact of changes.
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GFOA’s Core Elements of a Funding Policy
• Addresses the following topics:
– Frequency of actuarial valuations (at least biannually)
– Funding goals (same 3)
– Always contribute full ARC
– Be transparent in communications
• Then, they become more specific:
– Recommend Entry Age Normal Cost Method
– Asset Smoothing over no more than 5-10 years
– Apply a corridor if over 5 years
– Amortization of Unfunded Liability over 15-20 years, never over 25
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Conference of Consulting Actuaries White Paper
• Actuarial Funding Policies and Practices for Public Pension and
OPEB Plans
– Ultra-specific and detailed (27 page report)
– Defines “Model, Acceptable, Not Recommended, and Unacceptable”
practices
– Addresses same concepts as others, with slightly different conclusions
– Goes so far as to suggest what amortization periods to use for
assumptions/methods changes, plan changes, gains/losses
•
•
•
•
•
•
Plan Amendments: Lesser of active demographics or 15 years
Inactive Plan Amendments: Lesser of inactive demographics or 10 years
Experience Gain/Loss: 15 to 20 years
Assumption or Method Changes: 15 to 25 years
Early Retirement Incentives: 5 years or less
Anything amortized over more than 25 years is non-recommended, and over
30 is unacceptable
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The Great (or not-so-great) GASB
• GASB 67/68 issues
– Who pays for this work?
– Do we early implement GASB 67?
– What should we be doing to control the message?
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“I see dead people….but maybe not as
many as before.”
Dracula (1931) said “To die. To be really dead. That must be
glorious.”
• ASOPs now require actuaries to “consider” generational
mortality improvements when setting mortality assumption
– Causes contribution rates to increase
– Can we just “consider” accounting for them and choose not to?
• Talk to YOUR actuary about this….
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Does the Punishment Fit the Crime?
• In my opinion, the recent publications/rules do nothing but
the following:
–
–
–
–
Increase confusion
Make actuaries look bad
Disguise the true costs of these plans
Create controversy/problems, because what happens when law
requires one approach yet that approach is deemed “unacceptable?”
– Ultimately it punishes the membership and those that volunteer to
defend these systems
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Questions?
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