Actuarial Versus Market Value in Pension Plan Numbers: How About Just the Truth?

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Dallas downtown skyline with Margaret hut hills bridge at night.

Let’s say you are going to put your home on the market. You want to know what to list it for, so your realtor suggests getting an appraisal. Good deal. The appraiser comes over, measures for square footage, notes the type of floor coverings and windows, asks about updates. Then he or she takes a look at sales around you, real market value trades. That is how they determine the market value of your home.

In the world of pension fund valuations, seeking the value of your home might go like this: let’s add in a few variables (your neighbors might tear down and build new next door) and market fluctuations over a five year period, the notion that you might add a pool, spa and a new roof, lot values may go up, and take the average of all that. That’s kind of the actuarial value. It’s the “I want to sell my house for $1.5 million because I think that’s what it’s worth” value.

On that note, I found the NYT article about screwy pension accounting and two sets of books. A tiny pension plan for six people in California, decided to convert to a 401(k) plan in 2015. According to California’s renowned public pension system, Calpers, they had more than enough money until they went to pull the funds: surprise, the pension was underfunded. By a half million dollars. Whoa. That’s why William F. Sharpe, professor emeritus of finance at Stanford University’s Graduate School of Business, who won the Nobel in economic science in 1990 for his work on how the markets price financial instruments, says every city in the U.S. needs to demand to see the actual market values of all the pension funds they are responsible for.

Imagine if our Dallas City Council had done that five years ago. And then told us about it.

The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.

The market value of a pension reflects the full cost today of providing a steady, guaranteed income for life — and it’s large. Alarmingly large, in fact. This is one reason most states and cities don’t let the market numbers see the light of day.

But in recent years, even the more modest actuarial numbers have been growing, as populations age and many public workers retire. In California, some struggling local governments now doubt they can really afford their pension plans, and have told Calpers they want out.

Even scarier, this is a problem that reaches into the $3.7 trillion municipal bond market.

As we know only too well, municipal bond ratings take into account the strength (or weakness) of government pension plans, like our Police and Fire Pension Fund which has resulted in a lower rating for Dallas. So now what if the numbers are so wrong that people buying bonds based on sound pension plans (that are really not so sound) buy bonds as investments and get ripped off further? Yikes:

If those numbers have been consistently wrong, as dissidents argued, then actuaries were helping mislead the investors buying municipal bonds.

And the flawed standards worsen the problem every year, as shortfalls compound invisibly.

Why do they do this? To look better on paper. Public pensions are guaranteed by the state, which means taxpayers, so they want to look affordable on paper. Like this tiny California pension was actually earning 2.56% when they were “guaranteed” 7.50%. So the actuaries go with the $7.50% projection because it looks better and makes taxpayers believe they have less liability than they actually have.

Which is kind of screwy, no? Dare I say deceitful?

“Actuaries shamelessly, although often in good faith, understate pension obligations by as much as 50 percent,” said Jeremy Gold, an actuary and economist, in a speech last year at the M.I.T. Center for Finance and Policy. “Their clients want them to.”

Mr. Gold was also a ringleader of that stormy professional meeting in 2003. (He raised hell at an actuaries conference in 2003 arguing that current actuarial standards for public pensions are basically flawed. Duh.) Since then, there have been more conferences, monographs, speeches, blue-ribbon panels and recommendations — to say nothing of an unusual spate of municipal bankruptcies and insolvencies in which ailing pension plans have played starring roles. And yet little has changed.

I feel like asking my city councilman, Lee Kleinman, for a list of all the pensions we as Dallas taxpayers guarantee and for the market (not actuarial) values of these plans as of today. Anyone else?


Candy Evans

A real estate muckraker, Candy Evans is one of the nation’s leading real estate reporters. She is also the North Texas real estate editor for, CultureMap Dallas, Modern Luxury Dallas, & the Katy Trail Weekly. Candy has written for Joel Kotkin’s The New Geography, Inman Real Estate News, plus a host of national sites. Constantly breaking celebrity real estate news, she scooped former president George W. Bush's Dallas home in 2008. She is the founder and publisher of her signature, and, devoted to the vacation home market. Her verticals have won many awards, including Best Blog by the venerable National Association of Real Estate Editors, one of the nation’s oldest and most prestigious journalism associations. Candy holds an active Texas real estate license but does not sell. She is on the Board of Directors of Braemar Hotels & Resorts (BHR).

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