Wednesday, February 25, 2009

Actualizing Actuaries

Only for the financially wonkiest... We should learn the state of the city's pension system tomorrow I think. I have been thinking about something that is generally applicable to the pension problems everywhere, not just here. Buried in some corporate filings you are beginning to see inklings of a new accelerant in the pension crisis here and elsewhere. As the world grapples with the possibility of real deflation, or at the very least minimal inflation for some time the actuaries are being forced to take notice. It appears to me that assumptions of future inflation are directly or indirectly via other markets resulting in lowered discount rate assumptions. Think about what that means for the NPV calculations of future pension liabilities which are typically long term streams of fixed $ payouts. I'll leave it at that, those who know what I am talking about don't want/need me to expound.. those who don't have probably stopped reading already. This is not just a Pittsburgh story, but could have huge impacts for most all big pension funds, not the least of which are the major auto companies in the news. Might be one of the bigger financial stories out there.. uncovered because of the sheer wonkiness of it all.

Whatever we learn of the current state of the city's pension fund balances.. realize that its probably already a dated number. Whatever the pension fund balance was at the end of December, or even the end of January... consider how the markets have fared in just the last few weeks. Dow overall is down ~18% from early January. Factor that into the numbers and.........


Anonymous conshea said...

You're right! I stopped reading around "NPV calculations".

Wednesday, February 25, 2009 3:08:00 PM  

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