Measuring Pension Liabilities: Atlas Had It Easy
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According to New York Times reporter Mary Walsh, some defined benefit plan liability measurements are being called into question. Pressure to pretty up numbers or the use of older methods that don't reflect economic reality are two potential pitfalls. According to "Actuaries Scrutinized on Pensions" (May 21, 2007), New York actuary Jeremy Gold is credited for encouraging a reality check. If true that defined benefit liabilities are routinely undervalued (as some believe), the inevitable result is an added burden on taxpayers and/or recipients of municipal largesse when bills come due.
Making matters worse, lowball estimates of retirement plan IOUs can lead to expensive new benefits and/or an inappropriate investment policy. Walsh cites Alaska, New York and Texas as a few of the states with actuarial "issues." Unlike private plans, critics suggest that lax rules for public plans open the door to potential abuse.
This blog's author adds that a disconnect between actuarial numbers and economic assessments of promises to keep is no more disturbing than a gap between artificial accounting reports and the "real" liability. This is not to say that actuarial or accounting numbers are inherently skewed. Such a statement would be a gross and unfair indictment of hard-working actuaries and CPAs who are careful to avoid relying on unrealistic assumptions or refuse to succumb to political pressures.
The main message is that investment fiduciaries have no chance of realizing a "good" outcome if they start with imprecise numbers. Greek hero Atlas may have the easier task.
Editor's Note:
1. Check out "Will the Real Pension Deficit Please Stand Up?" (June 22, 2006).
2. Click to read "Pension Actuary's Guide to Financial Economics" by Jeremy Gold et al, published by the Society of Actuaries and the Academy of Actuaries in 2006.
