Heads must have exploded at the leadership of the American Academy of Actuaries and the Society of Actuaries once they realized some members of their joint Pension Finance Task Force were moving ahead with a paper challenging the standard actuarial practice of valuing public pension plan liabilities.
The paper seeks to contribute to bringing economic reality to valuation of liabilities, shedding light on the true cost.
But the initial reaction of the academy and SOA on Aug. 1 was to refuse to let the paper see the light of day. They suppressed publication, prohibiting the task force from posting or distributing the paper. To complete its suppression, the academy and SOA disbanded their joint Pension Finance Task Force, which was created in 2002 and, because of its longevity, appeared to have become more of a permanent fixture in the organizations.
Faced with mounting pressure caused by revelations of the action, the SOA on Aug. 26 relented and now plans to release a draft of the paper Sept. 5, followed by publication in the society's Pension Forum in October that includes different perspectives.
The paper calls for measuring public plan liabilities using risk-free interest rates instead of the standard practice of using long-term rates of return on investments.
The SOA deserves credit for backtracking on the original ban to limit expression it imposed with the academy. But its earlier action might still serve to intimidate members from expressing ideas and leave actuarial members and the pension plan community, including fiduciaries, distrustful of the SOA's embrace of objective research and discussion on actuarial issues.
Craig W. Reynolds, SOA president and consulting actuary at Milliman, in an open letter posted on the society's website, makes no mention of any support of the change by the academy.
For its part, the academy offered no comment on the SOA plans for publication other than acknowledgement that it will be released. The academy remains critical of the paper for not completing what it calls its rigorous review process and adherence to its editorial standards.
Thomas F. Wildsmith IV, president of the Washington-based academy and president and senior manager of public policy at Aetna Inc., in an open letter to members, said the academy “will shortly” be publishing its own paper “that will include concepts from financial economics.” Actuaries and the pension community have to wonder whether the academy will adhere to its rigorous review standards for its own paper, developed in the wake of the prohibition on the PFTF paper, which underwent the academy's review process for months.
The society and academy need to do more to undo the damage and restore trust by reaching out to members and the pension plan community, which relies on actuarial consultants to help determine valuation of liabilities and contribution requirements.
One way they could do so is to reject any ongoing effort like the one by the National Conference on Public Employee Retirement Systems. NCPERS is seeking to suppress any divergence from defined benefit plan orthodoxy, wanting to impose a form of control over service providers, including actuarial firms, and pension plan fiduciaries.
NCPERS last year adopted what it calls a code of conduct that's more like a pledge of loyalty. It puts obstructions in the way of doing business with firms not approved by NCPERS.
To enforce its code, NCPERS created two lists. One is a list of the good guys that adopted the loyalty pledge. Segal Consulting, whose services include actuarial work, and Gabriel Roeder Smith & Co., an actuarial consulting firm, were among the first signatories of the NCPERS code, both signing in February.
The other list is composed of bad guys, as defined by NCPERS, to give pension plan fiduciaries “a way to screen service providers for practices that harm participants and beneficiaries.”
For actuaries and money managers and other service providers, signing the NCPERS code of conduct raises the question of how such observance squares with their own professional codes.
For pension fund trustees, can they still meet fiduciary standards of duty when they observe the code of conduct, which obligates them to limit their opportunity set of money managers?
Pension plan funding is about finance and realistic valuation of liabilities. Efforts such as those by the Academy of Actuaries, the SOA and NCPERS that resist new approaches undermine the ultimate goal of pension income security, weakening public confidence in defined benefit systems. n