Tuesday, November 23, 2010

Forensic Actuaries

So this is for the uber-geeks out there. No, I'm not going to try and make sense of the machinations Downtown today.... Unfortunately I am going to look at even more convoluted city financial issues. 

I missed this story from last week: Team 4: Alaska Sued Pittsburgh Pension Manager For Big Bucks

A really worthy topic, and a story that I feel bad I did not catch.  but it gets the story wrong in one big way.  The topic is about Mercer, which is the hired investment manager for the City of Pittsburgh's pension funds.  The story goes into some seemingly relevant history that Mercer was sued by the state of Alaska over some pension issues and that in the end Mercer wound up paying a whopping $500 million to settle the suit. 

Before I go on...  see disclosure below*.

You would think the story is that Mercer was sued in Alaska for its management of pension funds and raises the obvious question whether Pittsburgh's pension funds were invested wisely.  Yet that is not the story it seems.   In Alaska, Mercer was sued not for its investment management of pension funds, but for actuarial services.  So the Alaska story has nothing to do with how Mercer managed investments as it is under contract for in Pittsburgh.  Pittsburgh's actuarial services are handled by another firm.

It all raises a really interesting question, possibly the story at the very nexus of all the pension problems facing the City of Pittsburgh.  Was the City of Pittsburgh prudently advised by its own pension actuaries?  Mercer was accused in Alaska for "not taking into account realistic data"... or put another way the assumptions that went into the calculation of required pension contributions were far from prudent. Has anyone really wondered why Pittsburgh pension fund has generally fallen ever farther behind when it comes to it's full funding level.  In some good years it would catch up a bit, but far less than it should have.. and in most years the funding ratio of the city's pension funds fell ever further behind.   Did the City's pension actuary fulfill its fiduciary duty in its work?

At the very least, it seems a worthy comparison to look at what happened in Alaska with the history here.  Any forensic actuaries around?  Would an individual pensioner have standing to sue?

* Ok.  I am not quite sure on this, but it turns out that I may have worked for the entity now known as Mercer.  How can this be ambiguous?  Well I once worked for a firm in NYC: Oliver, Wyman and Co.  Through some corporate machinations it looks as if Oliver, Wyman merged with Mercer and the distinct entities are both now parts of the greater Marsh and McClennan companies.  So it's a loose and distant connection, but don't want to obfuscate anything ever so I thought I would throw that out there.


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