Controversy simmering over gauging pension obligations

Debate over the proper way to measure pension obligations is once again in the spotlight, with the Actuarial Standards Board considering yet another way to measure them and a special congressional committee on multiemployer pension plans debating whether current practices control enough for investment risks.

While controversy over the proper way to measure pension obligations has simmered for more than a decade, it came into sharper focus in March, when the Actuarial Standards Board, Washington, proposed revisions to actuarial standards of practice, with a call for public comment by July 31.

Some of the proposed changes are an improvement, but "others will cause confusion and be difficult to implement," James E. Holland Jr., chief actuary at Cheiron Inc., McLean, Va., wrote in a comment letter.

The most controversial piece of the proposed revisions to Standard No. 4 — "Measuring Pension Obligations and Determining Pension Plan Costs or Contributions" — is a requirement to calculate and disclose an investment risk defeasement measure when an actuary performs a funding valuation. Nicknamed iridium, the IRDM primarily includes a requirement for a discount rate based on the yield of a fixed-income portfolio, either U.S. Treasury or high-quality corporate bonds. Similar calculations already are being done for accounting and other purposes.

The proposal unleashed a storm of reactions, many of them negative, about how the changes could adversely affect public-sector pension funds in particular, although actuaries for corporate and multiemployer pension plans had plenty to say as well. Other practitioners worry the proposed change will incur costs and additional work, producing numbers that could confuse, rather than clarify, pension plan funding decisions.

"While it appears that the public-sector actuary practice was the major focus of the proposal, it could have implications for other plans," said Eli Greenblum, chief actuary of the Segal Group Inc. in Washington.

The idea has some supporters as well, including Keith Ambachtsheer, president of KPA Advisory Services Ltd. in Toronto. The proposed IRDM "effectively requires that actuaries valuing and costing DB plans that provide payment guarantees to value those guaranteed benefits 'at market.' This would be a huge step forward in enhancing the credibility of actuarial practices," Mr. Ambachtsheer said.

Not everyone sees it that way. A group of 17 credentialed actuaries who do valuation work for public pension plans worry the calculations required by the new risk measure could hurt the actuarial profession's reputation, and see an even bigger risk from fanning anti-public pension sentiment.

"For years, some proponents of financial economics have claimed that the solvency/settlement value is the only true value of any pension obligation, and that actuaries, specifically those serving public pension plans, are misstating the true cost of pensions by performing funding valuations based on expected investment returns," the group's comment letter said.

"In the current low-interest-rate environment, actuaries have been accused of understating costs in the funding valuation. In a high-interest-rate environment, they would be accused of overstating costs," the group's comment letter said. Requiring disclosure of the IRDM "would require every funding valuation to include work product for which there is substantial evidence that it will be used to mislead the public, despite any explanations or limitations that are provided with the disclosure."

Representatives of public pension funds, including the $223.8 billion California State Teachers' Retirement System, West Sacramento, the $49 billion Colorado Public Employees' Retirement Association, Denver, and the $11.6 billion South Dakota Retirement System, Pierre, echoed those concerns in their comment letters.

"To ensure only appropriate and meaningful disclosure is provided, CalSTRS believes (actuarial standards of practice) should remain principles-based and should leave the details and manner to communicate disclosure elements of risk to the professional judgment of the actuary," CalSTRS officials wrote.

Groups like the National Association of State Retirement Administrators, the National Conference on Public Employee Retirement Systems and National Council on Teacher Retirement, as well as union organizations including the National Education Association, echoed those concerns.

Ten years after the global financial crisis, actuarial experts say they do understand the concern about investment risk, and how it should be disclosed. Yet they also point out that private-sector and multiemployer pension funds already have rules for calculating their funding needs.

"It's not going to add any value in the private sector, and it will upset plans by adding work and cost," said Alan Glickstein, senior retirement consultant at Willis Towers Watson PLC, in Dallas.

"You don't solve perceived problems with public-sector plans with an actuarial standard that has no teeth," said Mr. Glickstein, who sees the proposal as an effort to make a dramatic change in pension calculation standards indirectly through actuaries. "That's not their role. It's a role for Congress and regulators."

Congress is going to get deeper into the controversy as the congressional Joint Select Committee on Solvency of Multiemployer Pension Plans tries to deal with some struggling multiemployer pension plans that are facing insolvency and threatening to take the Pension Benefit Guaranty Corp.'s multiemployer program with them. Along with aiding the most troubled plans, committee members also are looking for ways to avoid future crises, including requiring the use of more conservative discount rates.

Studies of the impact of more conservative rates — commissioned by the National Coordinating Committee for Multiemployer Plans in Washington — paint a sobering picture. Horizon Actuarial Services LLC modeled the potential impact on the entire multiemployer system and Segal Consulting, a unit of Segal Group, did the same for a representative sampling of its multiemployer clients.

The Horizon analysis found that changing to a lower discount rate would cause a dramatic increase in required contributions and volatility, while basing discount rates on corporate bond yields would cause the percentage of well-funded plans to drop to 7% from 60%.

Segal Consulting found that using a 3.7% discount rate as a proxy for the current two-year corporate bond yield would require one plan to more than double its contribution rate to avoid a funding deficiency. For a second plan, contributions would jump to $400 million from $40 million over the next three years to avoid a funding deficiency. Considerably lower discount rates would expand the current pension crisis from about 10% of multiemployer plans to every multiemployer plan, Segal officials said.