Tuesday, December 22, 2009

Actuarial assumptions for the defined benefits pension plan

The following are the assumptions used by the actuaries to determine the liability of the Town's defined benefit (DB) pension plans:The Town will be recalculating the liability as of June 30, 2010. So I thought it'd be worthwhile to show you the assumptions used in the last valuation... and see if you have any comments on the next valuation? The primary assumption that jumps out at me is the 8.5% return. How many of us got 8.5% on our 401k this year?

I voted for Ron Paul. I'm not one of the fiat money guys, such as Greenspeak and Bailout Ben, who claim such returns are easily achievable... at least without a major correction.

Regardless, anyone have any comments? Breachway?

And from a budget perspective, if the new liability is much higher and the assets are much lower... the actuary may recommend large contributions to maintain a well-funded benefit plan. In turn, that would mean either service cuts or tax hikes to balance the budget... or in the case of DB plans, there are at least two other options:

1) Underfund the pension - a typical tactic used in Hartford

2) Juke the assumptions - for example, increase the "assumed" ROR to 10% or 12% and hope no one notices

I don't like those options. Either service cuts or tax hikes are better approaches in my opinion.

Tim White


mcjk said...


How about getting rid of the DB plans? I know you are for it and you are right! This liability is going to make the pool, the turf, the police dispute consultant (or fact finder as Schrumm calls him), look like peanuts.

Look at the FDIC, it is broke. Next the PBGC (Pension Benefit Guaranty Corporation) is going to be broke. You can google pensions or PBGC and find countless article on how bad pensions are doing. How is Cheshire going to stay immune to this?

Pension investments were historically supposed to be safe investments, and look what we have now: our pension invests in hedge funds or funds of funds to limit risk (lol).

So lets start a 401K plan or whatever for our town employees like the rest of the world.

As for suggestions of what to do:
1) Perhaps start conversations with town employees and tell them that in order to fund pension fund shortfalls increases in contributions must come from them first before the tax payers.
2)Really hammer the actuary firm doing this calculation on the 8.5 percent rate of return assumption; how are they getting it? What are other towns using? How can they justify it? What time line are they using when they say historically? You can also ask them to run the numbers with a more conservative rate of return (like US govt long term bonds -not that I think it is a safe investment).
3) Get the word out. You do an excellent job on this blog. Maybe at each town meeting you can communicate the status of the fund and start drilling this into the other TC memebers head. This issue could be the Republicans legacy going into the next election.

tim white said...

I believe the 8.5% is an assumption made by the town (historically made by staff, but presumably the Council can / should opine). And considering these assumptions were made two years ago... 8.5% seems like it fit quite well into CW. So I'm not really upset how we got that number.

tim white said...

Another thing to consider is that the 8.5% may be unrealistically low. At this moment, it seems ridiculously low with the Fed Funds rate around 0%. But if money ever starts moving again, we may see huge increases in the CPI, etc. Then my concern isn't about the DB plan, as it may eventually mean nothing.

It wasn't DB plans that broke Weimar.

mcjk said...


Not quite sure what point you are trying to make. In your blog you state if people are making 8.5% in their 401Ks and now you are saying 8.5% is low. Maybe if you provide some more detail into your thought process...

Regardless, you asked for some thoughts and ideas and I gave mine. My concern is that the new numbers are going to use the 8.5% rate and make all seem rosy. If that is the case then the can has just been kicked down the road (kind of like the pool - sorry had to put that comment in there).

As far as raising taxes I think there will come a point when citizens say you will have to take them "from my cold dead hands".

Breachway said...

I think the last report came out before the market tanked last fall. So this yrs gains(10-15%)will only be off setting SOME of last years losses. I think the better argument is that these plans are just more expensive/have more liability for the employer...aka the tax payer..period. With Tim's prodding, the town took the first step in eliminating some of the future employees from getting into the plan. I think the DB plan will continue to unwind as the TC looks further into it with a more open mind then has been in the past.

Anonymous said...


tim white said...

3:12... If I'm looking at the numbers the same way you're probably looking at them... those numbers make no sense whatsoever. Why would younger people consistently get raises higher than older people? On the surface, that makes absolutely no sense. I'm sure there's more than meets the eye there.

tim white said...

MCJK... Another thing to consider is that the 8.5% may be unrealistically low. At this moment, it seems ridiculously low with the Fed Funds rate around 0%.

s/h/b "unrealistically high."

Regardless, at the moment interest rates are incredibly low. So the 8.5% is high. But if Bailout Ben's Helicopter Money starts to circulate, then 8.5% may look extremely low.

mcjk said...


If Helicopter Bens money starts to circulate then the salaries are going to have to increase to keep pace with inflation. This is the other side. Yes I agree "if" we hit (hyper)inflation long term rates will rise. But will that keep rate with the necessary pay raises that go along with it.

I am not sure about this but it sounds to me (and I am probably reading into this incorrectly) that you are thinking inflation, yes, higher rates, funded DB plan.

I think it best that you look at the trend with these plans, look at the news, watch the PBGC start to go bust like the FDIC is, and get out of Dodge with the DB plans.

tim white said...

I still want to move toward ending the DB plans in a fair and equitable manner with employees.

As for 0% interest vs. hyper/inflation... I'm just saying that it's something to keep in mind.

Anonymous said...

Any town employees have any comments on this? I would be curious to hear from them. They are the people that are having their retirement benefits modified.

I have been hearing that with the new "nationwide healthcare plan" that is going to be shoved down our throats, pension plans are going to change as well to reflect medical expectations. I do not have all the specifics, but it almost sounds like employeer contributions are going to dictate how much medical insurance needs to be supplied. Details are still being worked out, but anything involving someones future should be carefully considered and set off to a later date.