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Old 04-12-2010, 05:31 PM   #21
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I can read my pension's annual report and understand about 90% of it without getting a headache. But the place that they get me at is the actuarial assumptions concerning future obligations. They cover so many details that I get bogged down in the details trying to figure out how one thing affects the future, and then I move on to the next assumption and have to wonder how it affects what I just read. Anticipated terminations, on-duty disabilities, what percentage of potential beneficiaries will be married (and have survivors that are pension eligible), average age, average lifespan, age differences between spouses, how many retirees are healthy and how many are not, decrement timing, decrement relativity, it just goes on for page after page.

I admit that I generally just skip to the summary of that section and hope that those people down at the pension fund have it figured right.
A pension fund has three involved parties: contributing members, actuaries and the contributing employer. The real problems with pension funds are usually not the actuarial projections but bad management or inadequate financial assumptions. Salary growth rate, different discount rates for benefit and asset valuations, expected rate of return for assets will tell you a lot.

Another thing to look at is how the money is being invested – not just asset allocations but how portfolio management is chosen, rated and paid.

You can see who the actuaries are and how much experience they have with similar work forces. Probably a good use of your time. I'm not saying that part can't be in fault, but it's not where the problems are concentrated and I've not heard of any issues involving collusion between actuaries and other interested parties.

In the past I would have also suggested to see who the auditors are but that doesn't seem as reassuring as it once was.
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Old 04-12-2010, 07:14 PM   #22
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You can see who the actuaries are and how much experience they have with similar work forces. Probably a good use of your time. I'm not saying that part can't be in fault, but it's not where the problems are concentrated and I've not heard of any issues involving collusion between actuaries and other interested parties.

In the past I would have also suggested to see who the auditors are but that doesn't seem as reassuring as it once was.
The auditors are BDO - and those who know, know BDO - so at least they have a cool advertising hook. Hmmm, will have to look at them some more.

The actuaries seem experienced in public pensions, but I'm still working on them.

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Gabriel, Roeder, Smith & Company has been providing high quality services in the areas of pension, retiree health, software development, and employee communications since 1936. GRS specializes in serving the public sector.
Then again, and perhaps this is just the supicious cop in me, somebody who does a lot of business with a certain type of client might be tempted to make those clients happy - even if it meant that everything wasn't done exactly right. Thinking Arthur Andersen here.
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Old 04-12-2010, 07:38 PM   #23
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We have had several different plans also, but I believe there are only 2 plans in effect now for active employees. The dinosaurs who were enrolled in the other plans have all moved on to greener pastures.

Clifp,

It appears my plan has about $750,000 per retiree, although the avg benefit is quite a bit higher than the avg you posted. Its closer to $44K per year.

Also, I was right about the number of participants in the plan growing. It grew almost 10% just this year alone.
As Leonidas points out really understanding pension plans definitely requires work. That's why I like to look at just a few numbers the ratios of workers to retirees and the assets to retirees.

If the plan is basically a pay as you go were current workers pay for retirees than you want to have a pretty high ration 3 or 4 to 1, although ultimately these are pretty unsustainable unless dramatic actions are taken to maintain high ratio of workers/retirees.

A better system (like Leonidas) is where there are sufficient asset to pay for retirees from the earning of the accumulated assets. A quick and dirty calculation is to look at the total assets and retires and see how big an annuity a private insurance company would pay out.

For instance using the TSP annuity calculator $750K would buy $41,736 SPIA for a 65 year. For a joint annuity with 100% survivorship (probably more typical) the figure drops to $33,732. Both figures assume a COLA capped at 3%/year which is fairly typical of pension benefits.

The hard thing is to find the average age of retirees, although most pension plans will mention it somewhere. The most informative plans include a histogram and along with average benefits in that class

Age Number Benefit
55+ 100 48K
60+ 200 51K
65+ 300 47K
70+ 200 43K
75+ 100 40K
80+ 50 35K
85+ 50 30K

If you have this level of detail you can work backwards and see how big a portfolio would I need to pay this amount for the 60-65 year, how much for the 65-70 year old etc.
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Old 04-13-2010, 07:48 AM   #24
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Auditors review, test, scrutinize and then agree with management assumptions, while actuaries develop and project their own assumptions. So the rate of return on pension assets is management with the auditors agreeing, while “Anticipated terminations, on-duty disabilities, what percentage of potential beneficiaries will be married (and have survivors that are pension eligible), average age, average lifespan, age differences between spouses, how many retirees are healthy and how many are not,” would be actuaries assumptions with management agreeing.

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Then again, and perhaps this is just the supicious cop in me, somebody who does a lot of business with a certain type of client might be tempted to make those clients happy - even if it meant that everything wasn't done exactly right.
Don’t need to be a suspicious cop to think that. It’s possible and would be quite hard to detect, likewise to prove. Still, contributing employers looking to minimize their funding obligations will more commonly focus on rate of return (too high), salary growth (too low), inflation and discount rates. Small changes here have a large impact over long periods of time and they are easier to understand and assess - and impose on the pliable auditors.

Another area I would keep in constant view is who is managing the fund, how management is rated and compensated and how investments are chosen. I did not appreciate the importance (and dramatic impact) of low costs and low fees until a few years ago, thanks to some M* and Boglehead forums, but this is a very high impact component as well which demands transparency.
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Old 04-13-2010, 08:50 AM   #25
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Leonidas,

Where did you find the numbers from 6/30/09?
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Old 04-14-2010, 06:38 AM   #26
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Leonidas,

Where did you find the numbers from 6/30/09?
I was moving back and forth a lot, because no one section had all the info. Most of the FY08-09 data came from the report of the independent auditor.
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