Alaska targets Mercer in pension lawsuit

Actuaries under scrutiny as markets drop and more pressure put on pension plans
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 04/07/2009

As funding for pension plans is increasingly scrutinized by employers, the role and responsibility of actuaries has crept into the spotlight. Most noticeably, Alaska announced in December it is seeking more than $1.8 billion US in damages from Mercer, accusing the HR consulting firm of “misconduct, negligence and inattention” in calculating the expected liabilities of two major pension plans in the state.

For almost 30 years, Mercer acted as actuary for the plans, which cover more than 80,000 retired and active participants and had an unfunded liability in June 2006 of about $8.4 billion US. Mercer provided valuation reports setting forth the actuarial value of the plans’ assets and liabilities and calculated and recommended employer contribution rates.

The most significant errors had to do with health care-costs and coding, says the state, as Mercer did not use health-care actuaries, underestimated the growth of health-care costs and “made fundamental errors in methodology and even in basic calculations, and failed to assign competent, experienced personnel to work for the plans.”

In a statement, Mercer says it stands behind its work and Alaska’s funding issues “are caused by a number of economic factors, including skyrocketing medical costs, a downturn in the capital markets and the fact that employees are retiring earlier and living longer than anticipated. Accordingly, beginning in 2002, Mercer advised the state to significantly increase its contributions to the retirement systems. The state is now attempting to hold Mercer accountable for these economic trends, over which our firm has no control.”

Could it happen in Canada?

So could the same blame-game happen here? There are a few differences with the Alaska situation that make it less likely to happen in Canada (such as post-retirement medical benefits, which are a large component of the claim) but it’s possible, says Doug Andrews, an actuary and adjunct lecturer in pensions at the University of Waterloo in Waterloo, Ont.

For one, Canada requires both a “going-concern” valuation — which looks at a distant horizon and assumes a plan will operate indefinitely — and a “solvency” or “windup” valuation — which assumes the plan is terminated and benefits have to be paid out.

The United States, however, only uses the going-concern valuation, though recently it changed the requirements for corporate plans to ones resembling the solvency/windup approach.

“Because we have both required and you have to fund in relation to both valuations, we’re probably in a better funding position in Canada than the U.S. and that should reduce the likelihood of litigation,” says Andrews.

In addition, “the assumptions in Canada are fairly heavily prescribed by the Canadian Institute of Actuaries so if an actuary was deviating from these assumptions, I would expect them to justify why they were deviating,” says Catherine Robertson, a Toronto-based actuary and principal with Eckler consultants and actuaries.

And the U.S. is a more litigious society. Just recently, the city of Chattanooga, Tenn., said it plans to sue its actuary concerning deficiencies with its fire and police pension fund. And

Global Pensions

magazine reported New Hampshire is considering a suit similar to Alaska’s for one of its pension plans (with an unfunded liability of $2.6 billion US).

Mercer not the only factor

One of the problems in the U.S. is sometimes the big firms, such as Mercer, are seen as having money that will solve all of a client’s problems, says Jim Murta, president of the Canadian Institute of Actuaries in Toronto.

“We are certainly trying to protect ourselves against similar super-huge claims in Canada,” he says. “We have well-defined actuarial standards, guidance notes and, I think, a better regulatory regime. Actuaries are also encouraged to have clear contracts with their clients which set out the responsibilities of each party.”

But there are similarities north and south of the border. The downturn in capital markets is certainly a factor as pension plans overall tend to invest in those markets, with fluctuating returns, says Andrews.

“One of the items that’s complicated matters is the financial markets, for example, which are much more volatile than before,” he says.

“During the 1990s, equity markets kept going up, with double-digit rates, and the valuation of liabilities was almost incidental to whole costs because the assets were performing so well. Now with the 2000s and the losses in the equity markets… there’s more need to look at how the liabilities are performing, so that’s put more scrutiny on those liability values.”

Mercer also claims employees are retiring earlier and living longer than anticipated, which is certainly true in Canada as well, says Andrews.

“There are those kinds of pressures that may well lead to Canadian pension plans showing defects or requiring greater funding than originally anticipated,” he says.

“Actuaries, in examining these plans, are typically choosing very long-range assumptions — the horizon’s often 30 to 65 years. Even if the actuary was to get it right, the valuations of these plans are done once a year or every three years and it’s highly likely there will be differences from the long-term aspirations.”

The whole area is becoming more scrutinized, says Robertson, “and it’s fair to say most employers don’t really understand what an actuary does. Employers are getting a better hold on what an actuary actually does and questioning it more.”

Sarah Dobson is editor of Canadian Compensation & Benefits Reporter, a sister publication to Canadian HR Reporter that focuses on total rewards. For more information, visit www.hrreporter.com/ccbr.

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