Comment letter on Oklahoma retirement-system bill (May 31, 2002)
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May 31, 2002 The Honorable Larry E. Adair Speaker Oklahoma House of Representatives 2300 N. Lincoln Blvd., Room 401 Oklahoma City, OK 73105 Dear Mr. Speaker: iThe Public Plans Task Force of the American Academy of Actuaries would like to take this opportunity to comment on HB 1719, legislation pending in the Oklahoma Legislature. The bill, if enacted, will require the five public retirement systems in Oklahoma to each add an appendix or addendum to their annual report containing an actuarial report on the condition of the retirement system using a statutorily prescribed set of actuarial assumptions. This requirement would be effective for the actuarial report as of July 1, 2002 and each subsequent year. The problems created by imposing, by statute, a uniform set of actuarial assumptions on five different retirement systems are numerous, but the Task Force would like to focus on two primary ones. First, and most importantly, prescribing a uniform set of actuarial assumptions to apply to five diverse public retirement systems is inappropriate. The demographic experience of each plan is expected to be very diverse and, therefore, the demographic assumptions such as mortality rates, turnover rates, retirement rates, and disability rates should also differ by plan in order to represent the expected experience of the plan as required by the standards of practice promulgated by the Actuarial Standards Board (ASB). It is generally true that ...
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May 31, 2002
The Honorable Larry E. Adair
Speaker
Oklahoma House of Representatives
2300 N. Lincoln Blvd., Room 401
Oklahoma City, OK 73105
Dear Mr. Speaker:
The Public Plans Task Force of the American Academy of Actuaries
i
would like to take this
opportunity to comment on HB 1719, legislation pending in the Oklahoma Legislature.
The bill, if enacted, will require the five public retirement systems in Oklahoma to each add an
appendix or addendum to their annual report containing an actuarial report on the condition of the
retirement system using a statutorily prescribed set of actuarial assumptions. This requirement would be
effective for the actuarial report as of July 1, 2002 and each subsequent year. The problems created by
imposing, by statute, a uniform set of actuarial assumptions on five different retirement systems are
numerous, but the Task Force would like to focus on two primary ones.
First, and most importantly, prescribing a uniform set of actuarial assumptions to apply to five
diverse public retirement systems is inappropriate. The demographic experience of each plan is expected
to be very diverse and, therefore, the demographic assumptions such as mortality rates, turnover rates,
retirement rates, and disability rates should also differ by plan in order to represent the expected
experience of the plan as required by the standards of practice promulgated by the Actuarial Standards
Board (ASB). It is generally true that police officers and firefighters have very different expected
mortality than the general public. It is also typical for teachers, as a group, to enjoy better expected
mortality than any other group. In addition, the economic assumptions for the plans should be based on
the expected experience of the plan, as required by the standards of practice promulgated by the ASB. If
each plan has a different investment policy, then it is reasonable to expect that each plan will have a
different actuarial interest assumption. Finally, given the different contracts negotiated for the different
members of the different retirement systems, it is reasonable to expect that each of the plans will also
have different expected increases in salary, and therefore different salary scales.
Secondly, although the uniform set of actuarial assumptions contemplated in this bill
may
, at the
current time and independent of other considerations, appear to be reasonable, over time, as the
economic and demographic environment changes, the prescribed actuarial assumptions will likely no
longer be reasonable. Amending the applicable statute to correct this situation is difficult, at best. Under
those circumstances, the retirement systems will be issuing reports, as required by statute, which contain
misleading information and could cause the reader of those reports to draw erroneous conclusions. This
is a situation that should be avoided.
1100 Seventeenth Street NW
Seventh Floor
Washington, DC 20036
Telephone 202 223 8196
Facsimile 202 872 1948
www.actuary.org
May 31, 2002
Page 2
The Governmental Accounting Standards Board (GASB) rejected the concept of a uniform
actuarial method for valuing public pension plans in 1994, when it repealed Statement 5 (effective in
1987) and replaced it with Statement 25. In the Basis for Conclusions, the GASB stated:
“The Board believes that a majority of users would find two sets of information more
confusing than useful. The disclosure of two measures of purportedly the same information
invites confusion about which is the “right” measure; it also invites selection of one or other
measure to support a particular position, whether or not that measure is appropriate for that
purpose.
“The Board has concluded that the selection of all actuarial assumptions should be guided
by the standards promulgated by the Actuarial Standards Board of the American Academy of
Actuaries.
“The Board considered but rejected the possibility of requiring a specific investment
return rate (for example, the expected return on long-term government bonds). Pension plan
investment portfolios vary both among plans and for individual plans over time. The investment
return assumptions selected for a particular plan should be best estimates at the actuarial
valuation date of that plan’s earnings on current and expected future investments.”
For these and other reasons, we recommend that this bill not be enacted.
Please call Todd Tuten, the Academy’s Director of Public Policy, at (202) 223-8196 if you have
any questions or would like to discuss this matter further.
Sincerely,
Amy S. Timmons
Chair, Public Plans Task Force
cc:
Senator Stratton Taylor, President Pro Tempore
Governor Frank Keating
i
The American Academy of Actuaries is the public policy organization for actuaries of all specialties within the United
States. In addition to setting qualification standards and standards of actuarial practice, a major purpose of the Academy is to
act as the public information organization for the profession. The Academy is nonpartisan and assists the public policy
process through the presentation of clear actuarial analysis. The Academy regularly prepares testimony for Congress,
provides information to federal and state elected officials, regulators and congressional staff, comments on proposed federal
and state regulations and legislation, and works closely with state officials on issues related to insurance. The Academy also
develops and upholds actuarial standards of conduct, qualifications and practice, and the Code of Professional Conduct for all
actuaries practicing in the United States.
1100 Seventeenth Street NW
Seventh Floor
Washington, DC 20036
Telephone 202 223 8196
Facsimile 202 872 1948
www.actuary.org
