1.3 The First Wave of Decision Making

The illusion of wealth created by the high discount rate used by actuaries in the previous decades drove what we call the first wave of decision making in pension plans. A classic example is the history of the AFM-EPF Fund’s benefit multiplier, shown in Figure 2.

Figure 2: Historical growth of the AFM-EPF Benefit Multiplier


Much has been written about the 4.65 increase in the multiplier made in 2000, but it pales in size to the incredible increases from the 1980’s. They were so large as to be imprudent even if the fund was overfunded. But by the 1990’s any overfunding had vanished and the later multiplier increases were completely driven by the illusion of wealth created by an excessively high discount rate.

The most indefensible feature of the 4.65 rate increase is that it was made retroactive.3 Remember that this generation was already using their time machines to siphon off the future generation’s gas. With this retroactive increase, the Trustees decided to join in with an additional gift of their hard earned petrol. Perhaps San Francisco was not deemed a worthy destination? If not, was it really necessary to supply enough gas to get that generation all the way to Hawaii, complete with complementary Hula lessons? If the benefit multiplier had been increased in a more reasonable fashion, for example by a modest 2.15% annually, we would be at 3.70 today and everyone would be very happy about that. Even more importantly, we would have reached this level with far less capital expenditure and stress on the Fund’s “nest egg”.

Taken together, these actions were major contributors to the deficit that we are paying for today. It is essentially a generational transfer of wealth from the current generation of laborers to the current retirees, many of whom are protected from any benefit cuts if we enter MPRA status.

1.3.1 The Regulators Step In

Post 2000, concerns about pension plan health began to be voiced by the Financial Accounting Standards Board (FASB). The IRS and Congress listen to the FASB and regulations began to be issued about the proper discount rate to use. Since 2000, the discount rate has declined which has pushed the accrued liability obligation higher each year. Figure 3 uses the actual AFM-EPF yearly discount rates to show how our Fund’s accrued liability has been affected.

Figure 3: Total 30-year liability on $500,000 using changing AFM-EPF rates


There is some “wiggle room” allowed actuaries on the discount rate used, so these rates are actually higher than perhaps they should be. If they held strictly to the 30-year Treasury discount, the Fund would appear in much worse shape. Note in particular that it was the changing discount rate which caused the liability to more than double between FY 2008 and 2016. The change in the discount rate, caused by the low interest rates (and new FASB guidelines) of the past decade, completely explains the doubling of the plan’s liability. And yet the Trustees continue to insist that the cause of this doubling is an increased life expectancy among musicians. The life expectancy required to double the plan’s liability in a decade is the stuff of science fiction, not fact.4 There was near universal ignorance about how pension funds actually worked among all parties involved in the 1990’s, so the Trustees of that period should be forgiven. Since the Trustees of 2017, Milliman (their actuaries) and Meketa Investment Group (their investment advisers) have been completely silent on this subject, we can only hope they know better. If they do not, it does not augur well for future decision making in either future negotiations, investments or benefit allocations.5

3We have found no evidence to support the persistent rumor that this increase was insisted on by the government.

4This “life expectancy” explanation for the Fund’s liability explosion can’t be found in any other pension analysis. For example, Russell Investments writes in “Discount rates fall and shortfalls increase…”: “…the single biggest factor driving plan experience has been interest rates. The median discount rate used to value liabilities fell… and this was the main reason for the actuarial loss…(Also included in the actuarial loss number is the impact of changes to the mortality assumptions…which served to reduce liabilities.)” (emphasis is ours).

5Milliman’s silence about the discount rate is especially puzzling, since they refer to its crucial role and effect on plan liabilities in many of their publications, e. g. “The Milliman 100 PFI funded ratio decreases to 83.5% as discount rates decline…” Also see the Milliman comments in Section 5