2011 EA Meeting

[Andy the Actuary]

Estimated attendance was 750-850, a far cry from the peak of 2,600. Average age looked over 50, which may be generously low. Owing to economic factors, aging attendee population, and the shrinking DB plan arena, it's questionable how long the EA meeting format can garner sufficient interest without significant reshaping (or significant legislation).

Of note is number of former private sector actuaries/consultants who now work for IRS.

American Benefits Council Exec. Kenneth Porter commented that Congress believed defined benefit plan funding was fixed and expressed no interest in discussing the subject.

Massive brain power continues to be focused on minutia, actuarial standards, and saving DB plans rather than focusing on retirement and retirement income policy. Perhaps, it's a matter of what you can get your hands around? Perhaps it's a matter of what constitutes continuing education in Joint Board's eyes.

The above are my observations, perceptions, and thoughts and are not intended to represent nor should it be inferred that they represent the general thinking.

[Guest Mike Melnick]

There was a very interesting panel discussion in the second general sessions concerning the crisis in public plans.

There is huge difference of opinion concerning the best interest rate to measure of the unfunded liability between economists and actuaries. The economists propose using a "risk free" rate under 4%, while the actuarial reports are using an average expected market rate of return that is greater than 8%. The differences in the measure of the unfunded liability are astronomical ($3 trillion according to the economists vs .5 trillion according to the actuaries). The fact that the economists and the actuaries are presenting two completely different stories about the extent of the problem of underfunding in public plans is very confusing to the public.

The argument of the economists, is that if the assets fail to earn the assumed 8%, there is an implied burden (equal to the value of the put option guaranteeing the 8% return) carried by the taxpayers. If you start with an 8% return assumption (reflecting assets with a significant equity mix) but then deduct the cost of protecting the fund with put options, the net resulting rate of return is only 4%. (They do include in their analysis a partial offset to the put option based on selling a call option for the possibility that the fund does better than 8%)

As an actuary, I have questions about the way the economist are defining the risk. It is not necessary for the fund to earn 8% every year. (That is what the put options guarantee). However, it is necessary the gains and losses offset each other soon enough (to avoid a funding crisis). It seems to me that a more useful, but more complicated definition of the investment risks, would have have measure the risk of so many multiple years of losses in a row, that the fund would could not make its required benefit payments without transferring a siginifcant new burden to the taxpayers. Such a risk depends on the projected cash flow (whether it is positive or negative), the maturity of the covered plan population, and so on.

However, I think that there should be more dialog between our professions (economists and actuaries). Although I did not agree with all the conclusions of the economist presented in the session, I value the thought provoking issues he raised. The questions raises are important and complicated, and merit discussion. The public is not well served by the conflicting analysis and messages. Perhaps the interest rates being used in the private sector (which at 6% is right in the middle) actually represent a better measure.

[SoCalActuary]

The public plan funding question continues to heat up, so I am curious if the written presentation of the economist's position is new or different from the others published elsewhere.

Who was the economist presenting their position?

[Andy the Actuary]

The public plan funding question continues to heat up, so I am curious if the written presentation of the economist's position is new or different from the others published elsewhere.

Who was the economist presenting their position?

Andrew Biggs. The presentation mirrored his paper in the Financial Analyst Journal. See attached.

Andrew_Biggs_Financial_Analyst_Journal.pdf

[Guest Mike Melnick]

The position of the economists was represented by Andrew Biggs, who is a Resident Scholar at the American Enterprise Institute (AEI).

[SoCalActuary]

One of the interesting points in Biggs article is on the transfer of liability between generations.

If current taxpayers are covering payments for past service benefits, then they are paying for work completed in the past, according to the concern addressed by GASB.

Further, if actuaries are recommending 30 year amortization using pv future pay on increasing salary scales, then the liability never actually gets paid for.