Tag: assumptions

MBTA retirement fund is headed for a financial reckoning

Mary Pat Campbell

Link: https://www.bostonglobe.com/2023/06/19/opinion/mbta-retirement-fund-finances/

Excerpt:

The MBTA Retirement Fund is going over a cliff, and the reasons why are well known. But neither the T nor its unions are in a hurry to do anything about it.

The new MBTA Retirement Fund Actuarial Valuation Report shows the fund’s balance as of Dec. 31, 2022, was $1.62 billion — about $300 million less than what it was just 12 months earlier. Its liability — the amount it will owe current and future T retirees — is over $3.1 billion, meaning the fund is about 51 percent funded. In 2006, it was 94 percent funded. A “death spiral” generally accelerates when retirement system funding dips below 50 percent.

In April, the Pioneer Public Interest Law Center got the MBTA to hand over an August 2022 arbitration decision regarding a pension dispute between the T and its biggest union. It contained a critical win for the authority: Arbitrator Elizabeth Neumeier decided that most employees would have to work until age 65 to earn a full pension, saving the MBTA at least $12 million annually.

But the Carmen’s Union sued to invalidate that portion of the decision, and the parties returned to the bargaining table. The new pension agreement they hammered out doesn’t include the historic retirement age victory; T management negotiated it away.

….

As of Dec. 31, 2022, 5,555 active employees paid into the fund, but 6,783 retirees collected from it. The biggest reason for the mismatch is the age at which T employees retire. Those hired before December 2012 can retire with a full pension after 23 years of service, regardless of age. Those hired after December 2012 can retire with a full pension at age 55 after 25 years.

The arbitrator finally gave the MBTA the win it so desperately needed, and T management promptly gave it back. Many MBTA managers have long opposed changing the age at which employees can earn a full pension, fearing the reaction of T unions.

….

Hard as it may be to believe, the T retirement fund’s financial outlook is even worse than it appears. Financial projections assume the fund’s assets will earn 7.25 percent annually. Over time, actual returns have been more like 4 percent to 7 percent.

These misleading projections are based on other faulty assumptions. In her 2022 decision, Neumeier refused the MBTA’s request to use newer actuarial tables, ruling that changing would be costly and that there was no compelling reason to update the tables. The ones in place are from 1989 — so old that they assume all T employees are men. Since women tend to live longer, the tables materially understate the retirement fund liability.

Author(s): Mark T. Williams, Charles Chieppo 

Publication Date: 19 Jun 2023

Publication Site: Boston Globe

Coordinating VM-31 With ASOP No. 56 Modeling

Mary Pat Campbell

Link: https://www.soa.org/sections/financial-reporting/financial-reporting-newsletter/2022/july/fr-2022-07-rudolph/

Excerpt:

In the PBRAR, VM-31 3.D.2.e.(iv) requires the actuary to discuss “which risks, if any, are not included in the model” and 3.D.2.e.(v) requires a discussion of “any limitations of the model that could materially impact the NPR [net premium reserve], DR [deterministic reserve] or SR [stochastic reserve].” ASOP No. 56 Section 3.2 states that, when expressing an opinion on or communicating results of the model, the actuary should understand: (a) important aspects of the model being used, including its basic operations, dependencies, and sensitivities; (b) known weaknesses in assumptions used as input and known weaknesses in methods or other known limitations of the model that have material implications; and (c) limitations of data or information, time constraints, or other practical considerations that could materially impact the model’s ability to meet its intended purpose.

Together, both VM-31 and ASOP No. 56 require the actuary (i.e., any actuary working with or responsible for the model and its output) to not only know and understand but communicate these limitations to stakeholders. An example of this may be reinsurance modeling. A common technique in modeling the many treaties of yearly renewable term (YRT) reinsurance of a given cohort of policies is to use a simplification, where YRT premium rates are blended according to a weighted average of net amounts at risk. That is to say, the treaties are not modeled seriatim but as an aggregate or blended treaty applicable to amounts in excess of retention. This approach assumes each third-party reinsurer is as solvent as the next. The actuary must ask, “Is there a risk that is ignored by the model because of the approach to modeling YRT reinsurance?” and “Does this simplification present a limitation that could materially impact the net premium reserve, deterministic reserve or stochastic reserve?”

Understanding limitations of a model requires understanding the end-to-end process that moves from data and assumptions to results and analysis. The extract-transform-load (ETL) process actually fits well with the ASOP No. 56 definition of a model, which is: “A model consists of three components: an information input component, which delivers data and assumptions to the model; a processing component, which transforms input into output; and a results component, which translates the output into useful business information.” Many actuaries work with models on a daily basis, yet it helps to revisit this important definition. Many would not recognize the routine step of accessing the policy level data necessary to create an in-force file as part of the model itself. The actuary should ask, “Are there risks introduced by the frontend or backend processing in the ETL routine?” and “What mitigations has the company established over time to address these risks?”

Author(s): Karen K. Rudolph

Publication Date: July 2022

Publication Site: SOA Financial Reporter

TAXPAYER PENSION COSTS EXCEEDED ILLINOIS PROJECTIONS BY $13.7 BILLION SINCE 2013

Mary Pat Campbell

Link: https://www.illinoispolicy.org/taxpayer-pension-costs-exceeded-illinois-projections-by-13-7-billion-since-2013/

Graphic:

Excerpt:

Unrealistic assumptions and missed investment returns have meant Illinois taxpayers paid $13.7 billion more for public pensions than state leaders projected five years earlier. Unless the estimates improve, taxpayers will pay an extra $21.3 billion during the next decade.

Illinois does a particularly poor job of figuring out how much money is needed to pay its public pensions: The past decade has seen the projections miss by 16%, which meant taxpayers needed to give $13.7 billion more than was estimated.

Author(s): Justin Carlson

Publication Date: 17 Jun 2022

Publication Site: Illinois Policy Institute

A chance to enter a new era of financial transparency and awareness for public pension plans

Mary Pat Campbell

Link: https://reason.org/commentary/a-chance-to-enter-a-new-era-of-financial-transparency-and-awareness-for-public-pension-plans/

Graphic:

Excerpt:

On Feb. 11, the Actuarial Standards Board issued a revised Actuarial Standard of Practice No. 4, effective February 15, 2023. The rollout has been low-key. The announcement says:

“Notable changes made to the existing 2013 version include expanding the scope to clarify the application of the standard when the actuary selects an output smoothing method and when an assumption or method is not selected by the actuary.”

But this description obscures a significant new required disclosure, one which follows years of controversy and acrimony within and among actuaries and the public pension plan community at large.  The requirement was the overwhelming focus during the drafting and comment period.     

The new required disclosure reflects economic reality better than any currently required number.

Author(s): Larry Pollack

Publication Date: 25 Mar 2022

Publication Site: Reason

New analysis shows San Diego’s pension system compares favorably to systems across state, nation

Mary Pat Campbell

Link: https://www.sandiegouniontribune.com/news/politics/story/2022-01-16/new-analysis-shows-san-diegos-pension-system-compares-favorably-to-systems-across-state-nation

Graphic:

Excerpt:

A new analysis shows the city of San Diego’s pension system is in strong financial shape compared to similar systems across the state and the nation.

While the city’s pension debt is nearly $3 billion, most pension systems face similar gaps between their investment assets and long-term projections of what they will owe employees when those employees eventually retire.

The comparative analysis, which was presented to the city’s pension board Friday, shows that San Diego has been in the top half of the nation’s largest 175 pension systems for “funded ratio” every year since 2013.

And the city’s ratio, which just climbed from 70.2 percent to 74.3 percent thanks to the robust stock market, has been in the top quarter of those national pension systems several times in recent years.

The city’s pension system, formally known as the San Diego City Employees Retirement System, also has among the most conservative policies regarding projections of long-term investment returns.

….

San Diego’s projected rate of long-term investment growth is 6.5 percent, which is at the very low end of the group of 175 pension systems.

Author(s): David Garrick

Publication Date: 16 Jan 2022

Publication Site: San Diego Tribune

Marin pension board takes conservative approach on big gains

Mary Pat Campbell

Link:https://www.marinij.com/2022/01/16/marin-pension-board-takes-conservative-approach-on-big-gains/

Excerpt:

Despite a 32% investment return in the last fiscal year, Marin County’s public pension fund is playing it safe.

The board of the Marin County Employees’ Retirement Association decided to factor in the extraordinary gain over four years rather than immediately when assigning annual employer contributions.

The association includes Marin County and eight other public entities. Its net investment return was $829.8 million for the fiscal year that ended June 30.

….

Last year, when the association’s board voted to cut the fund’s assumed annual rate of return from 7% to 6.75%, Block advocated reducing it to 6%. At that time, the association also lowered its assumed annual rate of inflation from 2.75% to 2.5%.

The Cheiron actuaries, however, said the association’s assumptions regarding inflation and the annual rate of return remain valid.

Author(s): Richard Halstead

Publication Date: 16 Jan 2022

Publication Site: Marin Indepedent

Hard Lessons From the Coming Public Pension Plan Shortfall

Mary Pat Campbell

Link: https://www.thestreet.com/investing/hard-lessons-from-the-coming-public-pension-plan-shortfall

Excerpt:

I predict that state and local government balance sheets, already reeling from the pandemic, will be devastated in coming years by the stock and bond markets’ disappointing returns.

That’s because these governments’ pension plans are based on unrealistic assumptions about how those markets will perform in the future, and are therefore woefully underfunded. In fact, even with their optimistic assumptions, those funds are already underfunded. Their “actuarial funded ratio” (the ratio of the actuarial value of their assets to the actuarial value of their liabilities) is just 71.5% currently.

These plans are hoping to make up their actuarial deficits by earning outsized investment returns. I’m willing to bet their earnings instead will fall far short of historical averages, and they will have to make up the shortfall either by raising taxes, cutting services, or declaring bankruptcy.

Author(s): Mark Hulbert

Publication Date: 25 May 2021

Publication Site: The Street

Tui plane in ‘serious incident’ after every ‘Miss’ on board was assigned child’s weight

Mary Pat Campbell

Link: https://www.theguardian.com/world/2021/apr/09/tui-plane-serious-incident-every-miss-on-board-child-weight-birmingham-majorca

Excerpt:

A software mistake caused a Tui flight to take off heavier than expected as female passengers using the title “Miss” were classified as children, an investigation has found.

The departure from Birmingham airport to Majorca with 187 passengers on board was described as a “serious incident” by the Air Accidents Investigation Branch (AAIB).

An update to the airline’s reservation system while its planes were grounded due to the coronavirus pandemic led to 38 passengers on the flight being allocated a child’s “standard weight” of 35kg as opposed to the adult figure of 69kg.

Author(s): PA Media

Publication Date: 8 April 2021

Publication Site: The Guardian