Actuaries see pension future — or not

After an historic stock market crash, public employee retirement systems facing tough choices could look to a new statewide panel for guidance or a second opinion.

But there’s a problem.

The governor, legislative leaders, the UC regents, CalSTRS and an association of county retirement systems have not appointed members to the California Actuarial Advisory Panel created by legislation last year.

Only CalPERS has made an appointment to the eight-member panel, chief actuary Ron Seeling. A spokeswoman said the office of state Controller John Chiang, which will house the new panel, is sending out letters urging that the appointments be made.

The legislation creating the panel, SB 1123, followed a recommendation in a report issued by the governor’s Public Employee Post-Employment Benefits Commission last year.

“It gives the boards of those smaller systems a place to go to get a second opinion,” said Tom Branan, a former staff member of the now-dissolved commission.

The big systems, such as CalPERS, have plenty of resources. But many of the roughly 80 independent public employee retirement systems in California might welcome some assurance that their plans are in the mainstream.

The commission said standards from the American Academy of Actuaries mainly deal with unacceptable practices. There has been “no single clearinghouse” that might help with the selection of “best practices” by actuaries and retirement systems.

“In addition,” said the commission, “such a panel would allow the public to be better educated by moving the actuarial practice into the public arena.”

Actuaries make the forecasts of future pension obligations used to set pension contribution rates, a growing cost (alarming to some) for state and local governments even before the stock market crash wiped out a third of the value of many pension funds.

The actuaries make predictions about when workers are likely to retire or leave their jobs, salary increases, investment earnings, inflation and other factors. Needless to say, it’s an exercise in statistics and probability, not a precise science.

There are ways to change the outcome of the predictions. Here are a few examples of how a pension contribution rate can be manipulated:

Extend the “smoothing” period for calculating investment gains and losses from three years to 15 years, extend the “amortization” period for paying off debt from 10 years to 30 years, assume investments will earn 8 percent a year instead of 5 percent.

It’s complicated stuff — and now a major headache for the boards of retirement systems, who must perform a difficult balancing act while plugging big holes punched in their investment funds by the market crash.

How do the retirement boards fulfill their legally required “fiduciary” obligation to protect pension recipients, without imposing crippling contribution rates on recession-ridden governments that are laying off workers and cutting programs and services?

An important role is likely to be played by actuaries, who also have figured in two state pension controversies in recent decades.

When former Gov. Pete Wilson lowered pension benefits for new state workers and made a raid on “surplus” CalPERS funds to help balance the state budget, he also got legislation giving the governor the power to appoint CalPERS actuaries.

Public employee unions fought back in 1992 with Proposition 162, which returned control of the actuaries to CalPERS, barred raids on pension funds and reinforced the power of all public employee retirement boards to raise contribution rates.

When Democrat Gray Davis became governor in 1999, the labor-friendly CalPERS board sponsored a bill that virtually eliminated Wilson’s lower benefits for new state hires, raised nearly all state pension benefits and lowered retirement ages to 50.

Actuaries played a role in the passage of the landmark bill, SB 400, which critics say led to similar public employee pension increases throughout much of the state that are now squeezing government budgets.

Legislators were told that the increased benefits would not cost the state more money. Instead, the new benefits would be paid for with investment earnings and revaluing system assets at 95 percent of market value, rather than 90 percent.

A Senate floor analysis of SB 400 said CalPERS anticipates “that the state’s contribution to CalPERS will remain below the 1998-99 fiscal year for at least the next decade.”

Six years later, Gov. Arnold Schwarzenegger was citing a dramatic increase in state payments to CalPERS as he briefly backed a proposed initiative that would have switched all new state and local government employees to 401(k)-style retirement plans.

State payments to CalPERS in 2005 had reached $2.6 billion, up from $160 million five years earlier. Some blamed the increase on the benefits authorized by SB 400.

But the nonpartisan Legislative Analyst said only about $600 million of the increase resulted from the new benefits. Most of the increase was due to a change in investment earnings.

A booming stock market allowed contributions to CalPERS to drop. Then when the market sagged, state contributions were increased to provide the funds required by actuarial forecasts.

During the 1990s, the state and many of the 1,500 local government agencies in CalPERS had enjoyed a contribution “holiday,” paying little or nothing into their pension funds as the stock market produced strong earnings.

The fact that the employees and retirees were not benefiting from the earnings is the reason, along with some “inequities” among worker classes, that CalPERS sponsored SB 400, according to the Senate analysis.

Deep in the governor’s pension commission report (p. 235) is a discussion of some of the difficulty facing actuaries as they try to deal with the gyrations of the stock market.

The chief actuary, Ron Seeling, is quoted as saying that CalPERS had a conservative approach in the 1990s with a three-year period for “smoothing” gains and losses and a 10-year “amortization” period.

Seeling said that approach could quickly pay off an unfunded liability. But when the stock market boomed in the late 1990s, the result was that the contribution rate for 75 percent of the employers dropped to zero.

“So what was really conservative approaches, ‘Let’s hurry up and pay off unfunded liabilities,’ completely backfires,” said Seeling.

Contribution rates soared again when the market dropped, bringing criticism from Schwarzenegger and others. In 2005, CalPERS tried to avoid the big swings in contribution rates by adopting an unusually long 15-year smoothing period.

But few if any actuaries could predict a historic stock market crash. CalPERS told its government agencies last fall that a contribution rate increase of 2 to 5 percent of payroll is likely if the stock market does not recover.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 19 Apr 09

4 Responses to “Actuaries see pension future — or not”

  1. Jack Says:

    Well everyone, it’s time to wake up…I’m a retired police officer and I hate to say it, but the end is near….I have written many times on these sites about the IDIOCY of the Gray Davis bunch who changed the formula of police retirees from 2% at 50 to 3% at 50 (a 50% increase). I know we will all enjoy the few years were going to get from this but the facts are the facts. With the average female officer retireing after only 8-9 years of service and living for 40 yrs or more on her tax free 50% pension and many officers taking early retirements and living far more years then the actuaries ever counted on and the knucle heads in PERS borrowing money to buy property in three of the worst areas of the country at the exact top of the bubble and then the stock market crash of 2008 (worst in 70 years) we are faced with a hopeless cituation. If property doesn’t start rising by 20% per year and the stock market by 10% per year then there is no way the pension fund can keep up with the current payouts. State taxes will have to be raised to over 15% at top levels and they are already the highest in the Union. Our fellow citizens will not tolerate that nor should they.

    Start living within your means and get to a level of spending that you only need about half of your pension to survive. Otherwise, you’ll need welfare to subsidise your way of life and in a state that is bankrupt, I wouldn’t count on too much welfare for retired cops.

  2. gaaps Says:

    As longevity increases, so too does the crippling cost of long-term care. This is a serious problem that needs to be addressed by innovations within the pensions and life insurance markets.

    Watch this lecture by Dr Geraldine Kaye on The Future of the Pensions Actuary given at the 2009 pensions conference of the Institute of Actuaries in the UK.
    http://gaapsblog.com/2009/06/30/the-future-of-the-pensions-actuary/

  3. Echo Dunn Says:

    Thanks for putting together Actuaries see pension future — or not Calpensions I am enjoying your posts. Would you consider a guest post? You can see my post style at http://timwicks.com.au and certainly I would be interested in having you post an article or two on my blog, what do you think?

  4. best-antivirus-program Says:

    best-antivirus-program…

    […]Actuaries see pension future — or not « Calpensions[…]…

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