The funding crisis that confronts many public pension plans has been well chronicled by this publication and others in the mainstream press. These problems are not easily solved and addressing them will require the expertise of the best and the brightest. Unfortunately, the recent 4-3 decision handed down by the Maryland Court of Appeals in Milliman Inc. vs. Maryland State Retirement System, et al., threatens access to that expertise at a time when it is needed most (Pensions & Investments, July 20).
The Maryland decision creates a dangerous precedent in the historical relationship between the client and its actuary. Based upon the damage theory utilized in the Maryland decision, any mistake or misinterpretation by the actuary resulting in the undervaluation of accrued liabilities and consequent recommended contribution relieves the plan sponsor from making the appropriate contribution and transfers that responsibility to the actuary. Consequently, the plan sponsor benefits if the actuary makes a mistake. This ruling creates a perverse incentive to give the actuary confusing, incomplete or even intentionally inaccurate data. If the questionable data is not caught by the actuary, a mistake can be claimed and subsequently prosecuted.
Pension valuations have many moving parts that are not obvious to those who do not work in the field. This is one of the reasons, along with the expense of litigating such a case, that we aggressively attempted to settle this dispute out of court for a reasonable estimate of the economic damage caused by the mistake. One of those responsible for oversight of the Maryland pension funds told me personally (after we had identified and communicated the mistake) that they were very happy with our work over the 20 plus years of our relationship. They brought the lawsuit because the pension plan stood to benefit from doing so. They felt they had a fiduciary responsibility to file the suit.
However, in the future, trustees of public pension plans will ask why they are unable to engage an actuarial firm that carries substantial insurance. They'll ask why they are unable to engage an actuarial firm without first agreeing to an enforceable limit of liability. They'll ask why they are unable to engage an actuarial firm with the sufficient gravitas necessary to address their issues. They'll ask why they, as trustees, are unable to fulfill their fiduciary responsibility to the plan. They'll ask, and there will be one reason why: Maryland.
Bradley M. Smith
Chairman, Milliman Inc.