What would happen if a private company fired its actuary for pushing the company to adopt the mandatory pension accounting method for the company’s pension?
I think we can agree that a scenario such as that wouldn’t go over well. How about a public pension plan? For whatever reason, public plans are not mandated to use the same pension valuation methods as private plans. The Wall Street Journal recently featured an article on this public subterfuge.
Two public employee pension funds, the Montana Public Employees’ Retirement Board and the Montana Teachers’ Retirement System, specifically state that actuaries that push for market valuation methods (like private plans) could be disqualified from
consideration. The problem is not legality; it is within Montana’s rights to discount their plans in any way that they wish. The Government Accounting Standards Board, which sets the disclosure requirements for public pension plans, is currently reviewing adopting market based valuation methods.
Even under the current accounting standards, public pension funds are $310 billion underfunded. The major push against adopting market based valuation makes good sense for the plans… unfunded liabilities would be much greater using private plan accounting. Robert Novy-Marx and Joshua Rauh of the University of Chicago estimate that plans would be $1.75 trillion underfunded if the funding was calculated using market based accounting. That’s a large pill to swallow.
What NOT to Do.
Throughout this ‘Great Recession’, California has emerged with the dubious distinction of an example of what not to do. CalPERS, the California Public Employees’ Retirement System, is the largest pension fund in the world. With $179.2 billion in assets in December 2008 (down 31.1% to that point in the recession), it has a lot of clout in the investing world. CalPERS reports results for this fiscal year this week, and is widely expected to be down 23% year over year. CalPERS estimated that even a 20% drop would bring their funding ratio (assets/liabilities) to 68%. Not encouraging.
Another issue with California’s pension system is the calculation of benefits. Pete Nowicki, former fire cheif of Orinda and Moraga, California, was able to ‘spike‘ his pension significantly upon his retirment. Nowicki, who made $186,000 at the time of his retirement, was able to jump through some hoops to move his pension to $241,000 annually. (Good for Pete; I have no interest in sparking some populist anger!) He took advantage of a system (much like you or I would!) which is broken. Combined with the ability to retire early (at 50 years old for firefighters and police in California), the public pension system needs to be rethought. California is not the only state in a pension hole, of course.
Now Go Fix It
Why are public pension funds not held to the same standards as private plans? Protection from bankruptcy is one possible explanation… but doesn’t seem to explain the double standard. The Pension Benefit Guaranty Corporation, created in 1974, insures private public plans against the risk of bankruptcy. If a similar protective ‘guaranty corporation’ exists in the form of government for public plans, shouldn’t those plans report their finances the same way as private plans? Pension reform would go a huge way to ensure financial stability in a number of states.