The Pension Crisis And The Systemic Failure Of The Actuarial Profession

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The global pension crisis has revealed the need to rethink fundamentally how pension systems are regulated.  It has also made clear a systemic failure of the actuarial profession.Since the 1970s, most actuaries have developed and come to rely on models that disregard key factors – including political whims, longer life expectancies, and lower investment returns when liquidity is paramount – that drive outcomes in asset and other markets.  It is obvious, even to the casual observer, that these models fail to account for the actual evolution of the real-world economy. 

Moreover, the current fee-generating agenda has largely crowded out research on the inherent causes of the pension crises.  There has also been little exploration of early indicators of systemic crisis and potential ways to prevent this malady from developing.  In fact, if one browses through the academic actuarial literature, “systemic crisis” seems to be an otherworldly event, absent from actuarial models.  Most models, by design, offer no immediate handle on how to think about or deal with this recurring phenomenon.  In our hour of greatest need, societies around the world are left to grope in the dark without a theory.  That, to us, is a systemic failure of the actuarial profession.

Up to now I have been plagiarizing the first two paragraphs of Chapter 12 of a collection of essays titled “What Caused the Financial Crisis” with only the words in bold italics replacing the original which related to the economics profession and the financial crisis as the authors wonder how economists could have been so blind. I wonder the same about pension actuaries.

  • Were the asset fees from 401(k) plans so good that they kept quiet about the inadequacy of these plans for participants?
  • Were the fees from public entities so good that they happily created funding methods to understate contributions and countenanced contribution holidays legislated by their politician clients?
  • Were they too busy generating those fees that they ignored seismic shifts in mortality rates and investment returns that undercut their numbers?

The implicit view behind standard equilibrium models is that markets and economies are inherently stable and only temporarily get off track.  The majority of actuaries thus failed to warn about the threatening system crisis and ignored the work of those who did.*

* This was the third paragraph of the essay with only that one word replaced.  I could go on this way to the end.

This post originally appeared at Burypensions Blog.