Actuaries Scrutunized!

[sayhey]

Originally Posted by short & sweet

SayHey, belated thanks for clarifying the intent of Jeremy's terminology regarding illiquidity.

So the FE perspective might be that the illiquidity of the pension obligation itself, relative to the plan participants, might imply lower liabilities (to reflect higher-yielding same-credit-quality more-illiquid long-term assets), while the illiquidity, or lower transferability, of the pension liabilities from one obligor to another, arguably might increase the liabilities (because ... (in simple terms for simple thinkers like me))?

Better late than never...

I don't pretend to speak for the FE perspective, but my guess would be that the guaranteed or known portion of a pension liability would be fairly liquid (annuities for current retirees receiving benefits) and that any other piece with unknowns is less liquid, because of these unknowns (timing and amount of benefit). In effect you are insuring against unknowns and that has a cost.

[JMO]

Jeremy, I just printed out your post. Your discussion has important implications for insurance liabilities, too. Thanks.

[WWSituation]

Jeremy - outstanding. Thank you for being someone who can articulate what many of us cannot.

[campbell]

To continue what JMO says, this relates to some of the arguments going on now with respect to principles-based approaches for insurance products.

I've read the Tony Day article, but I feel I should read it again -- many of these core principles take a while to sink in and be fully integrated in our work.

[Dan Moore]

Jeremy, thanks for your thoughtful reply.

[Emily]

I would guess, no. Financial economics only cares that the assets and liabilities be measure a particular way and disclosed.

[Jeremy Gold]

Financial economics is not a human being and thus it has no cares, preferences or feelings.

On May 1, Gordon Latter presented a paper "The Case for Marking Public Pension Plans Liabilities to Market," which he and I co-authored, at Wharton's Pension Research Council. It will appear on the PRC's website fairly soon.

It advocates that other jurisdictions emulate NYC's disclosures.

We think that the MVABO and its one year accrual MV(delta)AB helps answer three questions not answered by present disclosures:

1) Will future taxpayers be paying for services provided to current and previous generations of taxpayers? Or might the opposite be true?

2) How does the funding level, and benefit security, of this plan compare to plans in other jurisdictions in the U.S.?

3) What is the market value of benefits being earned by public employees this year? What does this tell us about their total compensation?

This information is valuable in its own right. But, once it is out there, it is likely that funding will be affected.

Yesterday GASB held an "educational session" that lasted all morning it was the last part of their three day Board meeting that began on Tuesday.

http://www.nytimes.com/2008/07/11/bu...t5XrHQz5/vizqw

[EA4ME]

I just don't see how publishing 5 different presentations of your liability would not be confusing. Jeremy, it does sound like you would ultimately advocate that a plan's funding use MVABO as well, is that right?

But if a standard is adopted that would mandate that plans disclose an MVABO, how does that alone guarantee that plans would move toward better funding? One of the reasons for the new standard would be so that the public and politicians could see what financial economists tout as the "true measure" of the plan's liabilities. But if plans continue publishing liabilities based on current methods, or go the route of NYC and publish five measures of one item, then how is the public expected to interpret this? I can see the media grabbing the number that works best for them (usually the one which makes the plan look in worse shape) and politicians and unions wanting to promise benefit increases grabbing the number that works best for them (the one that makes the plan look better funded). I see this as just creating a very messy and confusing situation.


Here is an interesting letter expressing some of the views of the other side.
http://www.pionline.com/apps/pbcs.dl...026/OTHERVIEWS

[Will Durant]

Too bad the author of that article has taken such a snide tone.

so-called financial economists

people who have drunk the financial economics Kool-Aid

Also, I find the following claims about financial economists rather bizarre

•they don't get intergenerational equity; and

•they don't get the societal implications of terminating DB plans.

Not much of value there, I think.

[EA4ME]

I don't know that I find those claims "bizarre", but I agree that there is certainly a tone to the letter, probably due to the author feeling somewhat defensive. That aside, I think he at least brings up a point to consider. That being the intentions behind some (not all) of the proponents of FE. And I don't mean that comment as directed toward anyone who is posting in this thread either. But perhaps we should consider why some people seem to be hopping on the band-wagon.