NCPERS presents Financial Economics and the

Transcript:NCPERS presents Financial Economics and the:
NCPERS presents Financial Economics and the Management of Public Pension Plans: A Critical Response Paul Angelo, FSA, FCA, MAAA Senior Vice President & Actuary, Segal Consulting September 27, 2017 Sherry S. Chan, FSA, FCA, MAAA Chief Actuary, New York City Office of the Actuary 5485051v3 The Market Pricing Controversy Ongoing controversy on how to value pension obligations for public sector pension plans The Level Cost Model Discount rate: expected return on assets Cost method: level cost based on projected benefits Based on established funding practices See Conference of Consulting Actuaries “White Paper” on Funding Policy The Market Pricing Model (“MV ABO”, aka MVL, “economic value”) Discount rate: market yields on low risk bonds (MV) Bonds with default risk comparable to the public pension promise Cost method: increasing cost based on accrued benefits (ABO) Based on “financial economics” (FE) “Understanding the Valuation of Public Pension Liabilities: Expected Cost versus Market Price” Society of Actuaries “In the Public Interest” newsletter, Jan. 2016 2 Terminology is part of the controversy Cost, liability, obligation and value: framework for discussion First, there’s the (unquantified) concept of “cost vs benefit” The “cost” is the hurt on the taxpayer to provide a good thing (retirement security) to the employee Then, “Cost” is the quantified amount incurred in a period “Liability” is the Cost accrued to date (one determines the other) “Obligation” quantifies the promise to date (e.g., FASB’s ABO) Depending on purpose, the Obligation value could be the Liability If so, then the periodic Cost is the change in the Obligation “Value” retains several meanings, both as verb and noun! 3 Terminology is part of the controversy Market Pricing proponents assert that “the cost” is that determined under the market pricing model Starts with MV ABO as liability (hence “MVL) Then the periodic cost is ∆ MV ABO (change in MV ABO) In contrast, the Level Cost Model reverses the order Starts with an allocation of periodic Normal Costs (NC) with the same actuarial present value as the member’s projected benefit Consistent with the periodic nature of the pension benefit Then the accrued liability is ∑ NC (sum of individual NCs) Under Actuarial Standards of Practice (ASOPs) 4 and 27, the basis for measurement of both cost and liability depends on the purpose of the measurement 4 “Market Pricing” and Public Plans Most discussion has been on whether public pension plans should disclose a Market Pricing type