In a New Pension Plan Actuarial Standard, a Subtle Warning of Possible ‘Fire!’

Commentary
Valentine’s Day, Feb. 14, closed out a state and municipal pension plan accounting regime that allowed plan managers—who are overwhelmingly politicians—to obfuscate the funding levels of their pension plans by making actuarial assumptions about anticipated rates of returns that are  largely illusory. A revision to the Actuarial Standards of Practice (ASOP) No. 4 at least calls foul on the practice.
New York City’s Grievous Example
Here in New York City, for example, our current and prior comptrollers, going as far back as at least 2008,  assumed an 8 percent, and then a  7 percent, compounded annual growth (or CAGR) even as the Federal Reserve drove the rates on AAA-rated bonds down to near zero in the aftermath of the financial crisis of 2008–09.  Even former New York City mayor Mike Bloomberg, a seasoned pro from Wall Street, said of the city’s sanguine CAGR: “It’s overstating it a little bit to say the only one who’s done that well is Bernie Madoff, but 8 percent  [the city’s CAGR in 2010] for a long period of time is not something that very many pension funds have ever achieved.” By comparison, private pensions  sponsored by corporations for their emploees were required to use a CAGR of around 3 percent, and even that was only for plan participants with a long timeline to retirement. The CAGR for the older pool of workers was even less….