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  #221  
Old 09-19-2016, 01:05 PM
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Originally Posted by snikelfritz View Post
Interesting, atleast the actuary there did do one adverse scenario, I mean, it fell on deaf ears, but, there was something.
Why aren't pension actuaries required to do this all the time??
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  #222  
Old 09-19-2016, 01:38 PM
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Why aren't pension actuaries required to do this all the time??
I think it depends on the context.

Any actuary giving on opinion on reserves is sort of forced into a single number, even if a range is more representative.
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  #223  
Old 09-19-2016, 02:05 PM
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It's a little long for this forum, but here's my response to the paper on financial economics:
Response to Financial Economic Principles Applied to Public Pension Plans
In reading the Working Paper prepared August 31, 2016, I view with interest the audiences for this effort.
The paper notes that the Principals with interest in public pension plans include “public employees, taxpayers, users of government services, and bondholders.” Absent from this list are those whose livelihood and political authority (power) is substantially affected by the presence or absence of such plans, and whose rewards from the plan are dependent on others who might not be principals. Yet those are the parties with the most influence on the policy positions of the plans.
The paper offers a foundational principle that in financial economics, “institutions exist to maximize value”, ignoring the other motivations for these plans. On the contrary, many of the principals have motivations which are political in nature, involving control, centers of influence, ability to receive revenue, retention of other perquisites such as incumbency, etc. They are not motivated primarily by maximizing the value of the institution, because their duty to self is to maximize value in other areas.
This is a fundamental concern in that the conflicting goals of the governing body compared to the principals to the plan render the theme of the paper to an academic discussion.
A similar point is to be made on the assertion that “transparency is necessary so that principals may hold decision-making agents accountable”, in that the authors assert that financial economics will instruct principals. Yet agents have other agendas, which do not necessarily reflect maximized value. In some respects, these agents have agendas to avoid transparency on pension issues because they are not directly accountable to the principals to the pension plan, thus creating personal gain.
Noting these conflicts between parties, the purposes of the paper include the representation that taxpayers should rationally expect to pay for services as they are rendered. I agree with this premise, but note that some agents make rational decisions to obscure or decline this assertion. Examples in history are plentiful, including many public works and public/private joint ventures, of which the national coast-to-coast rail system is one, and the ACA provisions for universal health care are another. Social Security is the largest such example, where agents rationally chose to “do it now and pay for it later”.
Further, there are significant cultural pressures to indulge in unequal financial results, found in collectivist traditions, charity for the poor, taking care of the weak, and other political terms applied. In those policy decisions where agents have rational needs to satisfy other agendas, there is purposeful avoidance of the principle to pay for services when rendered.
This paper attempts to open that process and expose the fact that intergenerational equity is not being applied, to which some agents and some principals to the plans will offer resistance. It becomes the political tool of an agenda of financial responsibility, and aspires to avoid some of the most egregious examples of undisclosed risk-taking that have occurred in recent history. If applied retroactively to many of the plan changes in the public plan arena, it would quantify the costs of exuberant optimism, of coercion applied to decision makers, and expose the self-dealing of certain decision makers.
An additional point must be made. Risk-taking by decision makers is applied within the context of systemic risk management of the underlying source of funds. The US govt undertakes many obligations without a confirmed source of revenue, knowing that they can control the money supply and exert political influence over creditors. By definition, they make the money and are too big to fail. State governments carry some of this risk-carrying ability as well. If they apply their full faith and credit to unbalanced financial institutions, then the decision makers are immune to transparency concerns.
There is another institutional issue as well. If a financial system is not sustainable on its own revenue stream, the legal system can transfer the risk to another party. Private employers have the PBGC for this mechanism, but public plans have the courts with their goals of protecting the promises made. Protests that taxpayers are mistreated are not received with any weight in pension litigation on public plans. This paper does not adequately address the role of the “ultimate guarantor” and the risks they must face.
With all the issues presented that limit its usefulness, I still support the paper as presented
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  #224  
Old 09-19-2016, 03:38 PM
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  #225  
Old 09-19-2016, 04:58 PM
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Yes, but my real message is:

"So what! You nerds don't count. Ha Ha." says the union rep and the politician
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  #226  
Old 09-19-2016, 06:59 PM
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It's a little long for this forum, but here's my response to the paper on financial economics:
Response to Financial Economic Principles Applied to Public Pension Plans
In reading the Working Paper prepared August 31, 2016, I view with interest the audiences for this effort.
The paper notes that the Principals with interest in public pension plans include “public employees, taxpayers, users of government services, and bondholders.” Absent from this list are those whose livelihood and political authority (power) is substantially affected by the presence or absence of such plans, and whose rewards from the plan are dependent on others who might not be principals. Yet those are the parties with the most influence on the policy positions of the plans.

...
Not sure about the rest, but this is the primary issue.
Also, in the case of CA Bill 400, lawmakers themselves were direct beneficiaries of the pension they were voting on.

I'm not sure how innumerate (if a continuous scale exists) one can be not to realize that a tiny increase in benefit from 2% to 3% of salary is a 50% increase in the payments, and that is a lot.
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  #227  
Old 09-19-2016, 07:14 PM
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The comments on that retort.
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  #228  
Old 09-19-2016, 08:49 PM
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The comments on that retort.
By which you mean ... ?
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  #229  
Old 09-20-2016, 05:31 AM
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Yes, but my real message is:

"So what! You nerds don't count. Ha Ha." says the union rep and the politician
Yup. That is correct.

So no point in wasting our credibility in playing along, don't you think?

Doesn't seem like it's in the interest of the profession to play along with the "how were we to know that our behavior is destructive" politicians, though the individual interest of actuaries wanting to retain/get clients might be different.

Unfortunately for non-pension actuaries, once the profession's credibility is trashed, it will be for all of us. People won't make the distinction that "oh, it's just pension actuaries who signed onto stuff that hid how expensive these promises were"
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  #230  
Old 09-20-2016, 06:35 AM
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It would be even more fun if there were a lump sum option at retirement, in addition. I vaguely recall that someone (Philadelphia ?) considered creating such an option and using 9% interest to value it.
You're thinking of the Milwaukee backDROP program, I believe.
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