Tag: actuarial value

“Everybody’s Not Going To Retire At The Same Time”: Actuary Evaluates Former Illinois Governor Edgar’s Pension Comments

 

Illinois map and flag

Last month, former Illinois governor Jim Edgar gave his thoughts on the state’s pension situation. He notably said he didn’t support the state’s pension reform law, and said the following:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it.”

Actuary Mary Pat Campbell, who runs the STUMP blog, weighed in on Edgar’s comments. As you’ll see, she is not a fan of Edgar’s pension knowledge. The full post is below.

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By Mary Pat Campbell, originally published on STUMP

Seems that not all recent Illinois governors end up in prison, (Quinn isn’t out of the woods yet!) but perhaps they should be jailed for this crap:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.”

First off, we do have an appearance of the 80% canard, but there’s a new lie that’s been creeping in that is pissing me off: “Oh, it’s not a problem right now… it would only be a problem if everybody retired at the same time.”

Let me explain, conceptually, what the pension liability is supposed to represent, and what the unfunded portion represents: it is what people have earned for their PAST service, and is using all sorts of assumptions, such as THE AGE THEY WILL PROBABLY RETIRE.

The actuarial value of the pension, under even the craziest approaches, does not assume everybody retires right now.

Let’s consider your pension value for a person still working: each extra year of service, they’ve earned some more. They are also a year closer to retirement. As long as they keep working and are still alive, the value of their pension increases, under most pension benefit design. Sometimes you’ll see a pension value drop at later ages, but that’s getting persnickety (though it has had some repercussions elsewhere).

The pension valuation is supposed to be a snapshot, indicating what has ALREADY BEEN EARNED. There are approaches that try to capture future salary increases, and tries to make accrual less drastic (as one usually does see huge increases in pension value right before retirement under some approaches).

The main time the pension value would be decreasing for a person is when they’re in retirement, as they’re not accruing more benefits, and each year they’re one year closer to death. The time the pension gets paid out is generally getting shorter. If the pension fund cannot cover retiree benefits, it’s in a really bad condition.

And here’s the deal: some pensions are not able to cover just the current retiree portion of the benefits:

Nobody is any more worried now than they were before the New Jersey Pension Study Commission report came out. Yes, “[t]his problem is dire and will only become much worse if meaningful steps are not taken quickly” but what does that really mean to anyone?

…. Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I doubt New Jersey is the only state in that situation. As noted earlier, Kentucky is looking really bad.

And in my recent teaser, I showed a set of graphs I am developing for various pension plans. The ones being shown were for Texas Teachers Retirement System. I will explain them in a later post, and start showing you some truly scary information — using the official numbers from the plans themselves.

But shame on Gov. Edgar for mouthing the same bullshit everybody else does in favor of underfunding the pensions. I have looked at over a decades’ worth of Illinois pension valuations, and for all major funds (except one), they deliberately underfunded by substantial amounts, even in “good” years.

If you’re not going to make contributions when times are good, guess what will happen to the pensions when times are bad?

I guess ex-Gov. Edgar wants to cover his own ass for the pensions being underfunded in the go-go 90s, when he was governor (1991 – 1999). Hey! Everybody was doing it! 80% is good enough!

NO, IT’S NOT.

SHAME.

 

Mississippi PERS Reports Boost in Funding Ratio, Drop in Liabilities

Flag of Mississippi

Actuaries for the Mississippi Public Employees Retirement System (PERS) reported during a board meeting Tuesday that the system’s funding ratio had risen from 57.7 percent to 61 percent during the course of fiscal year 2013-14, which ended on June 30.

The actuaries also reported that unfunded liabilities had dropped for the first time in at least 10 years.

From the Associated Press:

With stock market gains replacing steep losses in the accounting ledger, Mississippi’s main public employee pension fund posted stronger results last year.

Actuaries reported yesterday to the board of the Public Employees Retirement System that the funding percentage — the share of future obligations covered by current assets — rose to 61 percent as of June 30 from 57.7 percent on the same date in 2013.

The unfunded accrued liability, the amount of money that the system is short of being fully funded, fell last year for the first time in at least a decade, from $15 billion to $14.4 billion.

The system now projects that at current contribution levels, it will take 29.2 years to pay off the unfunded liability, down from a 32.2-year projected repayment period in June 2013.

PERS Executive Director Pat Robertson said the improvement supports the argument that the pension system can reduce its shortfall with time.

“I think it means that as we’ve indicated in the past, that time and patience will help get us back on the right path,” she said. “Our focus is long-term and our investments on a long-term basis will sustain the plan.”

The improvement comes, in part, because the fund’s 5-year smoothing period ended in fiscal year 2013. From the Associated Press:

The improvement stems from recent stock market gains as well as the end of an accounting period covering losses from the 2008-2009 stock market meltdown.

Like most pension funds, actuaries smooth out gains and losses over five years, booking 20 percent of the gain each year. Parceling out gains and losses is meant to reduce the volatility of market returns. In the 2012-2013 year, the system booked the last of five $1.05 billion losses from the 2008-2009 stock market meltdown.

Without that drag on results, the smoothed, actuarial value of the fund went up to $22.6 billion. Without such smoothing, the fund was in reality worth $24.9 billion at June 30, aided by an 18.7 percent investment gain in the previous 12 months. The fund has now achieved above its long-term goal of 8 percent gains in four of the last five years, giving it a tail wind for actuarial purposes in coming years, even if the stock market continues its recent decline.

“Even if we had a loss this year, we have some reserves from those gains that just happened,” actuary Edward Koebel told the board.

PERS will not be decreasing contribution rates for employees or governments as a result of the funding improvement. That’s because contribution rates were frozen by the PERS board in 2012 in an effort to pay down the system’s shortfall more quickly.

PERS manages $25.4 billion in assets.