A $1.9 billion goof has cost Watson Wyatt & Co. its 2-year-old actuarial contract with CalSTRS.
The error, which Watson Wyatt officials admitted, stems from the valuation of 1998 benefit improvements adopted by the $100 billion California State Teachers' Retirement System, Sacramento.
According to a letter from Mark O. Johnson, principal and consulting actuary at Milliman & Robertson Inc.'s Portland, Ore., office, the underestimation stems from the cost of projected benefits for active members. The cost of benefit improvements originally had been cited at $10 billion, but a 1999 valuation showed it to be $11.9 billion.
A major culprit was a change in Watson Wyatt's computer program, said James Mosman, CalSTRS' chief executive officer. The cost of benefits for participants leaving service before retirement was understated in three valuations, Mr. Johnson's letter explained. Other technical discrepancies also figured into the discrepancy, he wrote.
Another significant issue was that Watson Wyatt originally priced the cost of the benefit improvement at the time of the last valuation, which was then June 30, 1997. By the time the benefits were started more than a year later, costs had risen.
"It is not uncommon to calculate the fiscal impact of legislation as if it were effective as of the current valuation date, however, this was not disclosed in the Watson Wyatt letters," Mr. Johnson wrote.
Terminating Watson Wyatt in October, the CalSTRS board reinstated Milliman & Robertson Inc., Seattle, which had been had been the fund's actuary for the previous eight years but had lost out to Watson Wyatt in a competitive bidding process two years ago.
In addition, CalSTRS' board has decided to hire its own actuary so it can properly monitor the outside provider. That position, which has not yet been filled, will pay between $80,000 and $120,000 a year.