A research paper critical of existing accounting practices ofstate-sponsored pension plans will be published nextweek on the Society of Actuaries website.

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That news comes after several of the paper’s authors accused theSOA and the American Academy of Actuaries of effectively censoringresearch on public pensions' accounting standards, as reported inPensions & Investments.

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On Aug. 1, the presidents of each organization issued a jointstatement announcing the disbanding of the Pension Finance Task Force,which was created in 2002 for the purpose of advancing research anddefining best economic principals for pension actuaries.

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In the statement, the organizations said the decision resultedfrom the “nebulous and confusing” leadership structure of the taskforce and the conflicting missions of each association.

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“It has become clear that projects that the (task force) wouldlike to complete that may fall primarily under either the SOA’seducation-research mission or AAA’s public policy focus arebecoming increasingly difficult to complete under the jointgovernance model,” wrote the leaders of the two organizations.

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One of those projects was a working research paper, “FinancialEconomics Principles Applied to Public Pension Plans,” which callsfor public pension plans to use a risk-free interest rate tocalculate future obligations, a standard used by private sectordefined benefit plans.

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Public pension plans use a much more forgiving actuarialstandard for assessing future liabilities, which commonly assumes arate of return on pension assets of 7 percent to 7.5 percent. Therisk-free rate that actuaries recommend in the paper would bepegged to the 30-year U.S. Treasury, which now yields about 2.5percent.

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The recommendation that public pensions apply a risk-free rateto assess liabilities has massive political implications, as usingthe lower assumed rate of return would swell the collective $1trillion funding deficit for state-sponsored pension plans tonearly $3 trillion by some estimates.

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Those higher liabilities would ultimately fall on taxpayers, asstates would be required to increase annual contributions topensions or face the risk of seeing their credit ratingsdowngraded.

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In Illinois, for instance, the Board of Trustees for theIllinois Teachers’ Retirement System, the state’s largest publicpension covering nearly 400,000 teachers, recently voted to lowerthe assumed rate of return from 7.5 percent to 7 percent. Had thelower rate been applied to this year, the state would have had tocontribute another $421 million to the pension fund.

Media attention forces SOA and AAA hand

When the SOA and AAA announced the disbanding to the PensionFinance Task Force, the leadership specifically cited the papercalling for a more conservative measurement of public pensionliabilities.

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The work was intended to be published jointly, but theorganizations’ leadership said that was “no longer feasible.”

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The four authors of the paper were prohibited from releasing iton their own, but were encouraged to express their personal viewsin other forums, according to the joint release.

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Edward Bartholomew, one of the paper’s four authors, toldPensions & Investments the paper was “censored” by both SOA andAAA. “They didn’t want it to get out,” he said.

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That interview and story was referenced in several ensuing mediareports, including opinion pieces in the The American Interest andThe Wall Street Journal, which ran its coverage of the paper’salleged suppression under the headline “Covering Up the Pension Crisis.”

SOA says media mischaracterizing issue

This week, Craig Reynolds, president of the Society ofActuaries, published a letter saying an updated version ofthe paper will be available to view on the organization’s websiteduring the week of September 5th.

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The decision to do so was made before The Wall Street Journalpublished its opinion piece, which Reynolds said “misrepresentedthe viewpoints an activities of the SOA.”

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Reynolds explained that the SOA and AAA were unable to reachagreement on an “acceptable” version of the paper.

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Previously, the SOA has advocated that actuaries to publicpension plans disclose obligations and liabilities at the moreconservative risk-free rate, noted Reynolds.

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Beyond publishing an updated draft of the paper next week, theSOA is hosting a webinar on September 27, where one of the paper’sauthors will present views on public pension actuarialstandards.

AAA’s response to censorship allegation

Tom Wildsmith, president of the American Academy of Actuaries,called the accusation that the Academy is suppressing the paper“false on its face,” in a letter to AAA members.

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The working draft that was submitted for editorial review was“poorly written, poorly organized, and difficult fornon-specialists to read,” said Wildsmith, explaining why the paperwas not published.

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The paper’s tone was “more appropriate for an economic manifestothan an objective policy analysis,” he wrote. Upon receiving thefirst round of peer review comments, several members of the PensionFinance Task Force rejected the process and “left the table,”according to Wildsmith.

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“That made it impossible for the task force to bring the reportup to the academy’s standards,” he said.

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Nick Thornton

Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.