By: Mark Glennon*

The American Academy of Actuaries last week suspended Timothy W. Sharpe from membership for a period of two years for materially failing to comply with parts of its Code of Professional Conduct in connection with valuations he performed for several municipal police and fire pension plans in Illinois. The Notice is linked here.

Suspension is important because the Illinois Pension Code requires certain pension services to be performed by an “enrolled actuary,” which means membership in either the Academy or the Society of Actuaries (40 ILCS 5/4-118). Not being a member of the Society, Sharpe’s services in Illinois now presumably will end. He had continued to work for some Illinois pensions prior to the suspension while complaints pended against him.

The suspension is rare. Only 21 actuaries have been suspended or expelled from the Academy in the last 43 years.

Wirepoints readers will recall a number of articles here several years ago about Sharpe and his work for many Illinois public pensions. He and his work were discussed in a 2015 New York Times article, “Bad Math and a Coming Public Pension Crisis.” The focus was primarily on use of outdated mortality tables, which have the effect of understating pension liabilities.

Sharpe had been the subject of complaints by actuaries including one who went public, Tia Goss Sawhney. She published a guest piece here in 2014. Another complaint was filed by Jim Palermo, then trustee of the Village of La Grange, IL, who also took his case public. Palermo’s extensive work was discussed in the New York Times article.

The public owes a debt of gratitude to Sawhney and Palermo for their courage and persistence.

The story is significant for reasons beyond Sharpe and his work: It exposed glaring deficiencies in the process by which the pension actuary profession polices itself.

Put simply, that process is too long and too secretive. Just our 2016 article caused a fuss in the actuary profession. It merely reported that the Actuarial Board of Counseling and Discipline had recommended to the American Academy of Actuaries that Sharp be disciplined.

Why the fuss? Because the profession goes to great lengths to keep the disciplinary process private. There is no justification for its level of secrecy. How many other complaints are pending against what actuaries? For what? Isn’t that important for the public, and for pensions when making their selection of an actuary? But it’s all secret.

The process should be similar to that for attorneys. In Illinois, as in most states, pending complaints against lawyers are open to public inspection. An initial level of review screens out clearly spurious ones before they are posted.

Bad apples in the actuary profession and a poor disciplinary process in their profession are two causes of the mass obfuscation and understatement of public pension problems in America. However, it’s important to keep those causes in perspective — actuaries are hardly the only ones to blame. That case was made out nicely in a guest article by an actuary we published here two years ago.

There are, indeed, other causes of that obfuscation and understatement. Politicians ultimately run public pensions so they bear ultimate responsibility.

The accounting profession has gotten off far too lightly in the pension crisis. In particular, the Governmental Accounting Standards board is responsible not just for how pensions get reported but for the entirety of state and local financial obscurity.

That’s a major lesson I’ve learned researching and writing here over the years — the senseless of government accounting rules. Recently, we’ve written about a particularly silly accounting gimmick, presumably permissible under standards, that the City of Chicago exploited allowing it to claim a $7.7 billion improvement in its pensions.

We will strive to continue to identify those gimmicks.

*Mark Glennon is founder and executive editor of Wirepoints.

This article was updated to add the second paragraph.

 

 

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Dan Collins
1 year ago

The individual pension board will hire an actuary, the municipality will hire an actuary and the Illinois Department of Insurance will issue a general report. All will have a required contribution denoted. The problem is the municipality is allowed to choose between the three amounts found within the different reports. They generally pick the lowest amount which is almost always derived from their commissioned actuarial study. The even larger problem is that the pension boards have no legal recourse to require increased or mandatory funding. They just have to sit and take it. This is not true of IMRF which,… Read more »

Josiah
1 year ago

“Enrolled actuary” appears to mean one who is licenced to perform some pension related actuarial tasks by the Joint Board for the Enrollment of Actuaries. Members of the AAA, SOA and CAS are not automatically considered enrolled actuaries. And one need not be a member of any of these societies to be enrolled.

Josiah
1 year ago
Reply to  Mark Glennon

Yep, didn’t go down to the 5th and 6th usages if enrolled in the page. You are correct, membership in AAA or SOA is required in this context.

Jim Palermo
1 year ago

The takeaway from this suspension should be that elected officials and pension trustees need to pay close attention to the recommendation of their actuarial consultants. The actuary delivering the smallest municipal contribution at the lowest fee is probably doing a disservice to both the taxpayers and the plan participants.

j.a.herzrent
1 year ago

My sense is those who make the rules intentionally permit enough ambiguity to leave “room for interpretation.” Thus, I think there is culpability at the “upper” level where the rules are promulgated, sandpapered, and then abused by practitioners. This process leaves enough maneuver room for bad actors that they can delay sanctions and blow enough smoke in litigation to discourage opponents and force settlements. It’s impossible to write laws and rules in a way that avoids ambiguity. So we may be destined for continuing abuse from actuaries, CPAs, rating agencies and lawyers whom we suppose to be guardians of integrity.

1 year ago

He had already retired, tho, right?