By Raymond Berry
The following interview with three prominent pension actuaries was moderated by Anna Rappaport, FSA, MAAA, of Anna Rappaport Consulting. I am most grateful to Anna and Sue Martz of the Society of Actuaries as these two completed most of the work for this article. Stephen Bonnar is a Canadian actuary. Donald Segal and Ethan Kra are American actuaries.
Stephen Bonnar, FSA, FCIA, spent most of his career with Towers Perrin.
Donald Segal, FSA, EA, FCA, MAAA, spent most of his career with The Segal Company.
Ethan Kra, FSA, CERA, EA, FCA, MAAA, MSPA, spent most of his career with Mercer.
ANNA: You've had a long and successful career. What personal traits do you think contributed to this?
Steve: Intellectual curiosity. Actuaries need to keep up with practice development, but beyond that, be interested in moving into subsidiary fields. I moved into investment consulting and it gave me the opportunity to do something different. I also moved into financial stochastic modeling. That I think is a key characteristic that helped me be more valuable as an employee, and made my career more interesting for me.
Don: Finding a job you enjoy doing. I was a physics major but I wound up in a field I enjoyed and that I was good at. The ability to communicate with people was an important personal trait when I got into consulting. Also, having a sense of humor in dealing with clients and in the workplace often helps move things along … not being overly serious. I can truly say that I was one of those people who really loved their work and every day was an intellectual challenge. As a result, it was a stimulating and challenging career.
Steve: I agree. To be successful, you have to work hard, but it doesn't seem like you're working hard when you enjoy your work.
Don: Communication skills are very important, so that clients understand what you're saying. Actuaries have a reputation for being notoriously poor communicators. Talk in language that your audience understands.
Steve: In addition to getting your ideas across, it's how you present them. Give answers up-front and all the background after. Peel the onion. If a client asks a specific question, give a two-sentence answer. They probably want more than that, so then you provide more background around that number. Check if that satisfies their need for detail. In this way, you give the client control over how much they want to listen to and how much they want to pay for.
Don: To be a successful consultant, answer the question that should have been asked, not what's been asked. You, as the consultant, have to determine what answer will help this client. Respond first by, “why are you asking me that?' If you want to help a client, you have to understand what their problem is. Understand what they really need. Listening … develop the skill. Observe and see how others do things and adapt it into your own way of doing things.
Steve: One mistake I made—I selected courses at university where I didn't have to write essays. This is a change I'd make if I could do it all over again. Because of this choice, I had to work hard on the job to become an effective writer.
Anna: Steve, that is a great point. Going to Toastmasters helped me develop by learning management and oral communications skills.
Ethan: Passing the exams and getting fellowship and enrollment. Putting in the hours to study. There are no short cuts. Really concentrate to get through the exams.
You also need a quantitative background … such as physics, mathematics, operations research or statistics: you need to study a very challenging field. Then you can get through the exams more easily. In college, you don't need to learn specific material; rather you need to learn how to think, study and solve problems.
Get a good business writing course. Most college courses are on creative writing, not good business writing. Take a course on how to explain business concepts in writing … a critical skill set. I didn't learn that until I was a half dozen years into my career. I was mentored on this, and it was a critical skill for advancing. Each mentor you have will teach you different skill sets. I had many, and they were all invaluable.
Another skill set … to be able to conceptualize the big picture of a problem without attacking the weeds. Figure out the architecture of the problem. Very often there will be a complex problem with the pieces streamed together. You need separate modules to solve the problem. Don't try to solve the problem in one module. Break it into bit-size pieces and attach the pieces.
Anna: Don, Steve and Ethan have given us a great focus on what we need to do the work. A second set of personal traits relates to skills that help us navigate the organization and build contacts. It is very important to be able to sell your skills and to get work done. Both of these tasks require knowing how to work effectively in your environment.
It is also very valuable to know to whom to ask questions and who can help. Building up the right networks is another important skill for success.
ANNA: What was the most significant event in the retirement industry in your career?
Don: ERISA. I was a pre-ERISA actuary. It changed the assumptions and funding method from being the client's choice to being the actuary's choice. As the law developed over time, a lot of our judgment has been limited.
Ethan: ERISA, which created a regulatory environment for pensions with a lot of structure. The accounting profession made a big impact with FAS-87 and 88. They provided requirements for funding and accounting that required a lot of attention to pension plans along with nondiscrimination testing. A lot of high-quality thought was required. The second … the emergence of finance economics or pension finance. A total transformation of understanding of risk and the underlying finances of a pension plan. Went from an era in the '80s where everything was … the more risk you took the higher the interest rate and the lower the perceived cost. Risk has a cost that has to be factored in that was ignored. Risk increases the volatility of the cost.
Steve: In the mid-1980s, the Dominion Stores case was a situation where the plan sponsor applied to the regulator for a surplus reversion from an ongoing pension plan. The regulator approved the reversion. A subsequent court case overturned the approval and strongly castigated the regulator for failing to do its job. Since then, surplus reversions have essentially been eliminated. This caused most plan sponsors to fund their plans on a very minimal basis, which has not served subsequent generations of plan participants very well.
Anna: For me, globalization was also a huge change, although a gradual one.
ANNA: With many defined-benefit (DB) plans being frozen, would you recommend a young actuarial student enter the pension field?
Don: I'm not sure. I personally think DB plans will come back, but if a young actuary was looking to work purely as an enrolled actuary, opportunities will be limited. Ultimately, opportunities may be largely working with small- and medium-sized plans. There is a larger role for an employee benefit actuary though. In the future, a retirement actuary needs to know about cash benefits, health benefits and long-term care, and maybe about personal financial planning. The SOA's Living to 100 and post-retirement risk efforts provide insights. You will not be able to focus on one narrow area and be successful.
Anna: I think a broader focus on retirement is important. You need to think about different stakeholders: individuals, regulators and the financial service industry. But to me the huge question will be: How do I convert that into a good career?
Steve: In my mind, there are still prospects for DB actuaries but largely on the financial management side. If every organization with DB plans decided to close them down overnight, the Canadian annuity market couldn't absorb what sponsors would want to lay off to them. It would take the annuity market about 15 years to absorb all of the demand. The DB actuary of the future will focus on risk management and have less contact with the human resource side. I think there's plenty of work for an extended period of time. HR used to have the main management responsibility for retirement plans. Now it's usually shared with or transferred to finance.
In any case, managing the financial risks of the pension plans can't be done by the clients themselves, so there is still work for actuaries. I see opportunities in the arena spanning the bridge between investment and retirement consulting and in helping clients with policy development. My advice to new actuaries is you need to be prepared to transition to the asset side and to other new areas. Be prepared for a variety of opportunities.
Ethan: DB plans will come back, but the time horizon is very long. For a young college graduate, from the time he enters the field, it will be too late for him. I advise young students to avoid pensions. The demand in the next five to 10 years will be very limited. Promotion opportunities are limited. It will be 10 to 15 years before the environment changes. Right now, the very elderly in the United States retired with DB benefits. Younger retirees were in defined-contribution (DC) plans. In 15 years, when they are elderly and have spent their IRAs, there will be a reawakening for the need for DB plans, and Congress will stop attacking the golden goose. When the super-elderly finish depleting their DC accounts, the environment will change, and DB plans will come back in a more limited way. It will be so far out, though, that someone coming out of school today will not benefit from that transformation. DB plans have a better chance in local, not global companies.
I tell kids coming out to go casualty. Look at the number of enrolled actuaries who enrolled/re-enrolled from 2008 to 2011 &hellip numbers are down 20 percent.
ANNA: What are the major social issues relating to the changes in the retirement industry and what role should pension actuaries be playing?
Steve: Demography and longevity. As the baby boom generation moves into retirement, social programs will stress government finances. The population shift will also affect other aspects of government spending. There will be fewer younger people and therefore less education spending. In Canada, the overall dependency ratio is not expected to rise as high as it was in the mid-'60s. Actuaries have not spent enough time on this. We've ceded this area to academics. On the longevity side, there is a huge social issue of helping to change the cultural mind-set that age 65 was the end of work. It's a concept of retirement that needs to change. The retirement age should probably be raised, and the design of employment programs needs to be altered. (e.g., working hard one day and being retired the next is not the way of the future).
Don: Up to now, focus has been on “will you outlive your money?” There has been very little emphasis on the real period of later years, starting at 80 to 85, and the related support needs plus long-term care and health costs. We have to focus on “it's more than just income.” We need to redefine what retirement means.
Ethan: The average American (1) doesn't have a good perception of life expectancy and longevity risk, (2) has no clue of how much money is needed for a reasonable retirement, and (3) has no idea of the value of a DB promise. People are approaching retirement with inadequate resources and spend down too quickly. They underestimate the return on their money. Retirees should take 100 minus the age of the younger spouse and divide this into assets. For example, a 60-year-old would get 2.5 percent (100/40). That's the percentage of assets that retirees can spend each year. There are gaps in knowledge, and many workers refuse to cut their standard of living while working to save more retirement. People in their 50s spend too much on vacations, going out to eat and flat-screen TVs. They do not save enough.
Anna: We have focused on what people know and how they make decisions, what they focus on, longevity and demography. We have not focused on a changing value system. To me, a huge change has been the rise and fall of paternalism. From early in the 20th century through nearly the end of the century, large employers increasingly focused on meeting employees' financial security needs. There has been a huge shift away from this to much more individual responsibility. A key challenge for the actuary is recognizing the implications of the shift to personal responsibility and DC plans, and trying to find ways to improve retirement security in light of this shift.
ANNA: What does the evolving definition of retirement mean to you personally?
Don: In my life, retirement is no longer receiving a paycheck but it doesn't mean you're not thinking and contributing. I still am involved and have knowledge. What can I do for society with my knowledge and background?
Steve: Retirement means—leaving your primary career. However, I'm still very active with the Canadian Institute of Actuaries. On the other hand, I've actively tried to avoid consulting. I'm working on a Ph.D. in economics, to keep myself and my mind active.
ANNA: What suggestions do you have for the regulatory and legislative bodies regarding appropriate retirement policies?
Don: Congress should support and encourage DB plans. It needs to get creative in approaches to help strengthen the retirement system. Today, 401(k)s are popular. How about a DB match in a 401(k) plan? We have to find ways to encourage DB plans. We may need accounting rules changes. With the increasing number of older people, you can't rely on the government to provide too large a share of the retirement benefits and the costs of care.
Ethan: Congress should ban lump sums from DB plans. Mandate that all employer contribution matches must be annuitized. Mandate an option of a life annuity (or 100 percent joint & survivor annuity) with 20 years certain. Such an option will provide additional lifetime income and at the same time remove the fear of losing money on early death. Put these three elements together and in the long run you can improve retirement security.
Steve: I agree with the point of having government encourage DB plans. What changes can be made in Canada? We need to reassess the dual valuation approach. In general, the purpose of funding is the stability of contributions and benefit security. Let the government/regulators focus on benefit security only. What really scares me is the financial state of public sector pensions. There have not been sufficient provisions made for many public sector pensions.
Anna: An issue that is often forgotten is to think carefully about the implications of the DB to DC shift, and the gaps it creates. In a DC environment, disability can really destroy retirement plans, and policymakers need to facilitate closing that gap.
ANNA: What should the SOA and Pension Section be focused on in the next several years?
Steve: There needs to be a way to support and facilitate the expansion of what pension actuaries do relative to financial issues. The depth of knowledge that new actuaries have in accounting and risk management is often quite limited. That is an area to strengthen the support provided by the profession. The SOA should also reenergize interest in and response to demographic topics. It is becoming more and more important for pension/retirement actuaries to have good grounding in both of these areas.
Ethan: Do a study showing how the elderly dissipate lump sums too quickly. Demonstrate to Congress and regulators that lump sums are a bad option. People spend money down too quickly and then the government has to support them. It would be very helpful to have a study that shows how the money disappears so quickly. (Editor's note: The SOA Committee on Post-Retirement Needs and Risks research includes a study on Running Out of Money to be released before the end of 2012.)
Don: Think about what makes actuaries different … it's not just about the numbers. We give results context, risk parameters and ranges. We need more emphasis on risk management, especially in the retirement area. The Pension Section also needs to get more involved in what's going on in the international arena. We have to be less North American focused and think more about what's happening in the rest of the world because it may foretell what will happen in North America.
ANNA: How long do you plan to stay professionally engaged?
Don: At least until October 2013. I will still want to be aware of what's going on, but I probably won't be as actively engaged as I am now. I need engagement to keep my mind active though. I doubt that I will ever totally disengage.
Steve: I can't imagine complete disengagement. Only physical or mental difficulties would do that.
Ethan: Probably for another two to five years, and then I'll just teach or go back to school. I'd teach one course and advise students on careers … make sure they have the right skill sets.
ANNA: What advice do you have for younger actuaries?
Ethan: Look at your field within the actuarial community. Make sure there's adequate demand for your services. Look at people who have been there for five to seven years and see how it's going. There are different parts of the actuarial profession in which a person can have better career opportunities and growth than in others. If you pigeon-hole too early, it can stunt a career. You need to expand your knowledge. Learn about investments, ERM, so that you have a bigger picture. Learn about retiree medical if you're a pension actuary so that you have more skill sets.
Because of the psyche of the buyer, individuals need good quality advice … advice on insurance, annuities, retirement strategy, executive benefits. There are a lot of people giving advice who get a commission. Good advice costs money. Actuaries can provide that advice. In the long run it's often cheaper to pay a fee and do the right things. If the SOA could educate the public to the need to hire good-quality advisors on a fee basis and do some training to help actuaries become expert in giving that advice, that would be a useful social good and benefit the membership.
Actuaries should take financial planner exams but not to become commissioned salesmen. Educate the public to the value of independent advice.
Don: Keep your mind open. Enjoy what you do. Find your calling. Take charge of your own career—the biggest single thing. Don't wait for things to be handed to you. Go find and pursue your own opportunities. Learn to manage your career.
Steve: Intellectual curiosity is the key. Be open to learning. Consider different areas. There is nothing more stimulating than working in a different area and applying your skills in different ways.
Anna: Don't forget about developing key relationships inside and outside of your organization. Networks are key.
Raymond Berry, ASA, EA, MAAA, MSPA, is consulting actuary at Alliance Pension Consultants in Deerfield, Ill. He can be reached at email@example.com.