The American Academy of Actuaries and the Society of Actuaries Monday abruptly disbanded its longtime joint Pension Finance Task Force, objecting to a task force paper challenging the standard actuarial practice of valuing public pension plan liabilities.
“This paper (is) being censored by the AAA” and SOA, said Edward Bartholomew, who was a member of the former task force, in an interview. “They didn’t want it to get out.”
Others who were members of the task force also said in interviews the two actuarial groups are trying to suppress publication of the paper.
A joint memorandum dated Monday announced the disbanding of the task force to its members.
The memo was jointly written by Thomas F. Wildsmith IV, president of the Washington-based academy and president and senior manager of public policy at Aetna Inc., Washington, and Craig W. Reynolds, president of the Schaumburg, Ill.-based society and principal and consulting actuary at Milliman Inc., Seattle.
As reasons for disbanding the task force, the two presidents cited a “nebulous” governance structure of the task force and noted it was always “intended to be a temporary group.” The task force was formed in 2002. In addition, the memo noted “it has become clear projects that the PFTF would like to complete … are becoming increasingly difficult to complete under the joint governance model.”
One product of the task force was the paper, “Financial Economics Principles Applied to Public Pension Plans,” which has not been published or posted.
“As a work product of the joint PFTF, the paper … was … intended to be published by the academy and the SOA as a jointly owned and copyrighted paper,” the memo said. “It appears this is no longer feasible, and neither the SOA nor the academy will be publishing the paper or endorsing it. Because the paper was the work of the joint task force, we do not think it would be appropriate for members of the task force, as individuals, to take the existing paper and simply publish it somewhere else. We recognize that some of the individuals who have been on the PFTF have their own personal ideas and views on these topics, and the academy and the SOA encourage those individuals to express those ideas in other forums. But they cannot use the existing paper, with the particular expressions of ideas as developed by the task force, as the vehicle to do so.”
The paper, written by four members of the task force, including Mr. Bartholomew, calls for measuring public plan liabilities using risk-free interest rates.
“One of the assertions of the paper is that public pension plans are purported to be default-free obligations so they would be valued using default-free interest rates,” said a former member of the task force, who asked for anonymity.
Current public plan practice uses the long-term investment return of assets to value liabilities. The paper “challenged” that practice, said Mr. Bartholomew, a Washington-based independent pension consultant and former chief financial officer of the Inter American Development Bank, Washington, who helped oversee its more than $3 billion defined benefit pension plan.
“The issue came to a head with our attempt to get the paper published,” Mr. Bartholomew said.
When the academy and SOA leadership made their objections to the paper known, the authors offered to remove the task force label and have the society publish the paper under co-authors’ names only, while having side-by-side critiques written by actuaries opposed to its conclusions, members of the former task force said. But the academy and society refused to agree, the members said.
A financial economics approach using a risk-free rate, for example, of 30-year Treasury securities at a 2.5% yield compared to the current standard actuarial practice using a general 7.5% rate would add significantly to the liabilities of public pension plans, members of the former task force said.
”One of the purposes of the task force was to educate the actuarial profession in the same finance used by everyone else and bring them on board on that” approach, Mr. Bartholomew said.
“Public plans are under stress,” Mr. Bartholomew said. “Even under the (Governmental Accounting Standards Board) method, they show significant unfunded liabilities. Using the method we propose in the task force paper, unfunded liabilities are significantly larger and the cost to the plans significantly larger.”
Andrew J. Peterson, SOA senior staff fellow, retirement systems, in an interview, said: “As a work project of the task force, the paper isn’t going to be released. The paper has not gone through the full review process by the SOA and the academy.”
The paper “has been completed for months,” a member of the task force said. “It is the application of financial economics to public pensions. When they said it wasn’t completed, they mean they didn’t bless it.”
The society plans to host a webcast Sept. 27 “that will … cover many of the contents in the paper,” Mr. Peterson said. The society will make the webcast accessible at its website, www.soa.org.
Mr. Peterson declined to say what course the SOA might follow should the co-authors of the paper publish it. “These are legal matters we are not going to discuss,” Mr. Peterson said.
Members of the former task force said the paper, started in 2014 and completed last November, had gone over months of academy and society review. Co-authors incorporated some suggestions for changes but objected to other changes in tone and wording, the members said.
David Mendes, the academy’s assistant director of communications, said: “It’s important to keep in mind the discussion of the disbanding was based on governance issues, and the financial economics perspective will be considered in further work of the academy.”
The task force “was always intended to be temporary,” Mr. Mendes said.
