There is an old senior-common-room joke that while everyone else is carrying on a variety of discussions, the mathematicians are often off in the corner 'Pi/Lambda-ing'. That, I suggest, is what we see in the Society of Actuaries' report discussed in Charles Cowling's article (Dire states, The Actuary, April 2014). I suggest that this report deserves study by both American and British actuaries: it is a classic example of how not to communicate with the public.
It fails to communicate or even suggest that the prime problem of private pension plans (the possibility of the plan sponsor going out of business leaving pensions unfunded and, therefore, undeliverable) does not exist in the same way for public plans. Except for some small political units, public employers are not going out of business; more precisely, if they do we will have more to worry about than pensions. We need to address the problem up to, but not beyond, the following:
The major problem which can, and often in the US does, arise in public plans, is that there is no long-term balance between inflow and outflow. If total outflow valued on an open-group basis is not balanced by future expected contribution inflow, we obviously face serious trouble: either increased contributions or a Detroit-style collapse. It is not true, however, that some magic actuarial principle up in the sky suggests that accrued liabilities however defined must be funded in the same way, and for the same reasons, as in a private plan. "Pension obligations should be funded for employees over their public service career" says the report, without explaining what this means or even noticing that in many public plans there are unfunded obligations in place for employees who are already on pension.
Elsewhere it tells us "intergenerational equity [requires] fully funding pension benefits over the average future service period of public employees". Should public plans be brought to full funding at some future point so that contributions fall significantly after that point? If so, why? Cui bono? I understand that if this is not done in a private plan, future retirees may lose out; there is no such problem in a public plan if it is in the kind of long-term balance described above.
It is worth noting that if we have a major political disaster, even any public plans which are well enough funded to gladden the SoA's heart will be swept away. The pre-funding which produced that happy situation will be wasted. Intergenerational equity? I suggest not.
The report notes one member dissented from the Pi/Lambda-ing, but it is not clear why. I think the profession and the general reader should be told. Having recently promoted myself from retired SoA member to former SoA member for reasons some of which are obvious from the above, I guess I now fall into the general-reader category.
The editor welcomes readers' letters but reserves the right to edit them for publication. Please email [email protected]. The deadline for receiving letters for the July issue is 18 June 2014.