Larry Bader Rethinks Pension Finance
Larry Bader Rethinks Pension Finance
After 20 years of a traditional actuarial career, Larry Bader moved to Wall Street. There he became intrigued by the difference between the way Wall Street and the actuarial profession look at the valuation of cash flows and related matters. In retirement, he continues to study the disparity between the two viewpoints.
By Sam Phillips
Larry Bader worked for 20 years as a pension consultant at Mercer. While employed there, he acquired the usual pension actuarial initials and served in various actuarial organizations, including the SOA Pension Section Council and the American Academy of Actuaries Board of Directors. In 1986, he joined Salomon Brothers, dividing his time between asset allocation research and benefit issues that arose in mergers and acquisitions, bankruptcies, employee stock ownership plans and other investment banking work.
In 1995, he returned to Mercer for two years, focusing on the intersection between the corporate finance he had learned at Salomon and the traditional actuarial practice. He then retired to North Carolina, where he lives with his wife, 15–year–old son and 14–year–old daughter, and continues to ponder the mysteries of financial economics, golf and teenagers. There he has written the articles that occasioned this interview.
You were nominated as a pioneer for your "work in marrying financial economics with actuarial models." Please explain what this means and how you accomplished it. While using traditional actuarial calculations, financial economics brings the discipline of capital market pricing to bear on the selection of economic assumptions and asset valuation. Without this discipline, actuaries may present only an average or expected pension cost level that fails to reflect the risk being borne by shareholders (or taxpayers, for a public plan).
For example, suppose that a corporate pension plan sponsor adopts an equity–oriented investment strategy. The capital markets will appreciate the low expected contributions, but will also recognize that the contribution stream is vulnerable to equity risk and will assign a cost to that risk. So the total economic cost of the equity strategy may be no lower–no more attractive to shareholders–than that of an immunization strategy that promises a higher but stable contribution level.
Of your many career accomplishments, what do you consider to be the most memorable/personally satisfying? Publishing "Reinventing Pension Actuarial Science" in 2003 with my frequent co–author Jeremy Gold is most definitely a highlight. This article engaged pension actuaries in what was called "The Great Controversy" at an SOA seminar later that year, featuring numerous papers and strong international participation. Though financial economics is far from universal intellectual acceptance in the actuarial profession, and farther still from full incorporation in our practices, the profession's understanding of modern corporate finance has advanced enormously. Pension actuaries–who have too often been limited to playing defense in the ongoing worldwide reforms of pension finance–are now positioned to play a knowledgeable and constructive role.
The "reinventing" article focused on measuring pension liabilities. I followed that article with others who explored various facets of pension plan management. Pension fund investment was the subject of "The Case Against Stock in Corporate Pension Funds, The Case Against Stock in Public Pension Funds, and Pension Deficits: An Unnecessary Evil." Funding was addressed in "Why Bother With Going–Concern Pension Plan Valuations?" as well as the "pension deficits" article. "The Treatment of Pension Plans in a Corporate Valuation" presented a Wall Street view of how pension plans affect shareholder value.
What are the most significant risks taken in your career and how have they paid off? I didn't think of my job changes as significant risks, and the main "pioneering" work came only after I retired, so I wasn't really risking anything more than the tranquility of my golden years. There surely was some loss of tranquility. Many actuaries strongly disagree that certain actuarial judgments should be replaced by impersonal market judgments, and that the cost and risk of pension plans tend to be understated.
Still, it's easy for someone in my position–removed from the commercial pressures of actuarial practice–to question and pontificate about the fundamentals of that practice. It is quite a different matter for a practicing actuary to recognize the merits of a fresh approach to his or her lifelong work, much less to explain the sometimes unpleasant consequences to clients. My admiration goes to people like Bob North, actuary for the New York City pension plans, who have taken the risks of working to educate plan sponsors and the general public about the insights of financial economics.
What about your actuarial training and experience has been most helpful in your career? Actuaries would like to be, and be seen as, professionals who thoroughly understand businesses and their risk management issues. Though we are making good progress, we are not there yet. But we are certainly considered smart people with great analytic skills and mastery of some difficult topics. When we have something to say, and are able to say it clearly, decision–makers are more than ready to listen to us. When we're involved in business projects that include a significant actuarial component–say, an acquisition or a bankruptcy–our skills and training often make it easier for us to acquire the knowledge of other people's areas than for them to acquire our expertise. At Salomon Brothers, this dynamic sometimes gave me opportunities to transcend the actuarial role and help provide overall team leadership in dealing with broader business issues.
What are five things every actuary needs to do to be successful? Sages were assembling this sort of list before Aristotle and will continue to do so long after Stephen Covey. So I doubt that it's possible to compose a universal list that avoids Samuel Johnson's alleged response to an aspiring author: "Your manuscript is both good and original. But the part that is good is not original, and the part that is original is not good." But since you asked...
- Recognize that there is no universal list.
- Make your own personal list of what you need to be successful.
- Start by deciding what it means for you to be successful. When I retired, I had been reasonably successful by conventional measures. But I'm far more satisfied with my post–retirement actuarial writing career, during which I've held no positions in actuarial organizations, served no clients and earned no money.
- Figure out your strengths and preferences: are you a manager, a salesperson, a technician, an innovator, an educator, a mentor, a consultant? (More than one answer is allowed, and the answer can change through time.) Then play to your strength.
- Don't spend too much time in your comfort zone–that's not the way to grow.
What advice do you have for up and coming actuaries? Look for opportunities to incorporate viewpoints from outside the profession in your actuarial education. Though the exam syllabus is impressively broad, there is no substitute for practical experience in other areas. Working at Salomon Brothers and breathing the air on Wall Street gave me insights into the capital markets that I could not have gotten from books. Similarly, I'm now gaining quite a new perspective on retirement as a volunteer tax preparer in an AARP program to assist low– and middle–income retirees. Any serious discussion of Social Security privatization would be incomplete without a view of the substantial or total dependence of so many seniors on the indexed pensions of Social Security, and the widespread mismanagement of such nest eggs as they've managed to accumulate.
When you're not busy "pondering the mysteries of financial economics, golf and teenagers," what do you do in your spare time? I spend time with my wife, my computer–wizard son and my track–star daughter, and try to keep up with my two globe–trotting older daughters. I also play a lot of golf and enjoy running–21 marathons at last count, most recently the Boston Marathon last April. Yes, it's busy. But what more can you ask from retirement than to be doing everything that you want to do and nothing that you don't want to do?
Sam Phillips is staff editor at the Society of Actuaries.