Pension formula plans:
Are actuarial firms told to ass-u-me too much?

Nipawin - January 19, 2001 - by: Mario deSantis


Public and pseudo public pension plans should not be designed as pension formula plans. The pension formula plans describe the pension available at retirement as dependent on the member's contributory pension salary in the last few years prior to retirement and dependent on the length of (pension contributory) employment with the member's employer. Pension formula plans are a carry over of private traditional pension plans where the employer wanted to reward its employees for length of service and loyalty. Pension formula plans are still effective to satisfy the management requirements of a private business, but pension formula plans should be eliminated entirely in the public and pseudo public sector.




Another type of pension plan is the money purchase pension plan, whereby both employee and employer make pension contributions on behalf of the employee and such accumulated contributions are used to buy a pension at the employee's retirement.



of the
pension plan

With the pension formula plans you know more or less the pension available at retirement, however this type of pension requires the periodic consultation of actuarial professionals to determine the liability of this plan at the end of any fiscal year. Instead, with the money purchase plans you always know how much the accumulated contributions are at any point of time, and as a consequence, there is absolutely no need of actuarial consultations to determine the liability of the pension plan.



actuarial liability

The main difference between the pension formula plan and the money purchase plan is that with the formula pension plan there are additional extra expenses for determining the actuarial liability of the plan, while with the money purchase plan there is no such expenditure.



managerial discretion

As I am concerned, all public and pseudo public pension plans should be money purchase plans for the reason that the employers are providing a public service for which the extent of managerial discretion should be minimal. On the other end, for private businesses, the managerial discretion is higher than for the public service and therefore the pension formula pension would make more sense.




Now, the actuarial evaluation to determine the liability of the formula pension plan is based on many assumptions. There is the saying "if you ass-u-me too much you make an ass of you and me." So, different actuarial businesses and different pension sponsors, some time they get together and play games. For instance, the pension sponsor tell the actuarial business to have a lower pension liability and the actuarial business friend changes the assumptions to satisfy the client. At another time the pension sponsor tell the actuarial firm to have a higher pension liability and the actuarial business friend changes again the assumptions to satisfy the client. These games are being played for many reasons, to detract attention from administrative or other problems, to show higher or lower incomes, and so forth. This is why I support money purchase pension plan for public and pseudo public organizations.




In Saskatchewan, for instance, the Saskatchewan Association of Health Organizations (SAHO) pension plan is a formula pension plan and it has more than one billion dollars in reserve/liability. This pension plan is supported by both employees and governmental contributions, yet there is the magic that SAHO pension plan is a private pension! This SAHO pension plan is managed by a committee within SAHO's umbrellas. And you reader just tell me, given the state of our health care, if these SAHO's people headed by Big Brain Brian Rourke are concerned about health care or about money and the investment of over a billion dollars of pension money!




The Board of Regina's Police pension plan is suing the actuarial firm of Watson Wyatt Worldwide and three of its employees for a total of $37 million plus interest. The board claims that the consulting firm failed to ass-u-me the proper statistics for the calculation of the liability of the police pension plan.




The morale of this story is that there are strong reasons to support money purchase pension plans for our public and pseudo public agencies, and one reason is the avoidance of both extra actuarial consultations and possible litigations.
  List of relevant political and economics articles


Alleged pension gaffe lands in court: Miscalculation worth $37 million, Regina police say. By Barb Pacholik, January 13, 2001, The StarPhoenix, Saskatoon, Saskatchewan