Letters to the Editor

In my view, you overlooked a couple of key points in your "Unsuitable limits" editorial in the June 28 issue. Let me preface my comments by stating that my fund's actuary (a major firm) has not proposed liability limitations on their work.

The first point overlooked is that the insurance coverage available would not make much of a dent in the potential claims a plan sponsor of a large fund might pursue but, even at low levels of coverage, the premiums have become egregious.

The second, and far more important, point is that implied limits may exist even if express limits are not stipulated. For example, if a plan sponsor is dealing with someone who is effectively a sole proprietor incorporated as an LLC, the assets of the firm might consist of a desk, a phone and a personal computer. Would a plan sponsor be better off having unlimited liability with such a firm or with a large firm that restricts liability exposure to X times their annual fee? I believe the answer to that should be self-evident.

Unless plan sponsors and actuaries are able to come to reasonable agreements on this subject, I could easily envision actuaries migrating to sole-proprietor arrangements. Under such arrangements, I fear that plan sponsors would be relegated to dealing with individuals who have no meaningful corporate assets and severely limited depth in terms of staff resources. In my opinion this would dramatically increase risk to the plan even though it would likely comport with some people's view of unlimited liability.

Preventive maintenance through periodic due diligence exercises, such as actuarial reviews (audits), seems to me to be far preferable to finger pointing related to errors that may have been allowed to go undetected for protracted periods. Proactive due diligence is very much a part of many of the relationships fund officials have with outside service providers — in my view, actuaries should be no exception.

Gary Findlay

executive director

Missouri State Employees' Retirement System

Jefferson City

The editorial "Unsuitable limits" in the June 28 Pensions & Investments makes some good points, but misses a few essential ones.

Actuarial firms are not unique in their desire to limit liability for damages stemming from mistakes made by their employees. Physicians, hospitals, dentists and some governments do this as well. Summer camps will often not accept children whose parents refuse to sign liability waivers.

The editorial cites examples of firms being sued for amounts exceeding $1 billion. Indeed, a mere 1% mistake in a $50 billion actuarial calculation results in a $500 million alleged loss. These are enormous sums of money that very few, if any, actuarial firms can afford to pay. Insurance for amounts such as that will likely be either prohibitively expensive or impossible to obtain. Liability insurance for unlimited amounts is definitely impossible to obtain.

Actuarial calculations are imprecise to begin with, based upon assumptions and judgment. The editorial mentions mistakes, negligence and fraud. While fraud is, in my view, another matter, determining whether or not "mistakes" or "negligence" have occurred is a subjective matter. Determining the potential amount of damage associated with a particular mistake can be equally subjective.

A solo practitioner who offers contracts without limitation of liability is offering less protection to clients than a larger firm that offers contracts that do involve a limitation.

Refusal to accept reasonable liability limits is likely to lead to a reduction in the number of actuarial firms willing to serve pension plans, and an increase in the costs of providing such actuarial services should they continue to be offered.

I have permitted surgeons to operate on my children knowing full well that a significant surgical error could produce death, and that no one could undo that effect. In such an eventuality, I might have sued the surgeon, but I would not expect the result to be the financial ruin of the surgeon, the hospital wherein the surgery was performed, and all of the people who work there, many of whom may not have known the surgeon, and most of whom would have had no involvement with my child's surgery. A $1 billion judgment against most actuarial firms would have such a result and could not be paid anyway.

The editorial encourages plan sponsors to refuse to accept "unreasonable liability limits" and "to make sure actuarial firms have the insurance and other support to cover appropriate damages." Basically, I agree with that point of view. I think the debate needs to center around the meaning of "unreasonable liability limits" and "appropriate damages," as well as on the availability and affordability of insurance (the cost of which ultimately falls on the clients).

Brian B. Murphy

Gabriel, Roeder, Smith & Co.

Southfield, Mich.