COPA Comments on draft CRUSAP report

October 31, 2006

CRUSAP
American Academy of Actuaries
1100 17th Street NW, 7th Floor
Washington, DC 20036

Ladies and Gentlemen:

These are comments of the College of Pension Actuaries on your September 2006 draft report.

We applaud your work. We feel our profession is healthy, but there is room for making it healthier. We believe your work has the potential for a significant contribution towards this improvement. We make comments in this letter that might seem highly critical. However, all of our comments are intended to be constructive. We hope you will view them in this light.

In general, any aspects of the report not discussed in this letter have our support.

Additional Bureaucracy

We note with concern your recommendation for two new committees: an Oversight Board and a Discipline Committee. Each would include non-actuaries. Presumably, the activities of these new committees would occur on a regular basis. Any such activities would slow matters considerably. It would mean volunteers from within the actuarial community would be asked to commit more time to their tasks. This might discourage volunteers.

With respect to the proposed Oversight Board, we see little substantive contribution it could make towards improving our profession’s service to the public.

An advisory board that could be consulted from time to time by the NAAC might serve a useful purpose, provided this board served only “on demand.” The demand would occur when the NAAC wanted to expose an issue to observers outside the profession. This would be similar to the process the ASB follows when it asks outsiders to review exposure drafts of new standards.

With respect to the proposed Discipline Committee, unless the various entities are consolidated, we see no possibility that any entity will cede control over discipline decisions to an outside entity.

A Discipline Committee that reviewed the conclusions of the ABCD would be extremely cumbersome if it included non-actuaries. It would be necessary to educate the non-actuary members of this committee each time an alleged practice violation was considered. The ABCD has often been criticized for taking too long to complete its assignments. An inspection of the factors involved justifies the length of time the ABCD currently requires. However, addition of the proposed new committee would further extend these time requirements. This extension would be very difficult to justify.

In the unlikely event that the separate actuarial organizations became willing to cede final disciplinary decision-making to an outside body, the sensible approach would be to establish that the ABCD is this outside body.

Our concerns run to costs, too. The additional cost of paying travel and other meeting expenses for two new committees meeting regularly could be significant. The consequence could be a dues increase attributable solely to the activities of these two committees. We have already reached the point where an actuary who wishes membership in multiple actuarial organizations faces an excessive dues burden. We are concerned over increasing this burden.

We believe that the proposal to add these two new committees may be a solution looking for a problem that does not exist – at least in this country.

The Nature of Standards

We believe that standards developed by the ASB should be principles-based.

However, those of us in the pension field face an unpleasant environment in which the regulators are writing too many of our rules. We suggest consideration of a change in which our own standards will become detailed to the point that the regulators no longer feel compelled to write such detailed rules for our work. Their rules often fail to reflect sound actuarial principles. We believe additional detail in our standards and the notion of principles-based rules do not have to be mutually exclusive.

There is one important concept that we must keep constantly in view. If we mean to have principles-based rules, we must make it clear that a practitioner who fails to follow these principles will run a high risk of disciplinary action by the ABCD.

In general, we believe that ASB standards should focus on codification of existing customary practices. However, we believe the ASB should constantly be on the lookout for situations where existing customary practices fall short. This approach of “raising the bar” has already occurred, for example, in the data quality standard. The approach should receive more attention than it has been receiving.

To illustrate, consider the statutory funding standards enacted in the 2006 Pension Protection Act. These standards focus intensively on protecting pension plan participants if their employer should encounter financial difficulty over the near term. In contrast, customary practice has placed much more emphasis on smooth funding policies that focus on the long term. It would have been desirable if the ASB had identified the need for short term security, exposed proposed standards that meet this need, and educated the profession on the importance of modifying existing practices. The result might have been self-imposed rules that are sounder than those of the new law.

Another aspect of the standards setting process deserves attention. At present, there is no formal way to clarify any ambiguity in a standard. If an actuary has a question regarding application of a standard to a particular situation, there is no alternative other than a request for guidance submitted to the ABCD. If the ABCD is uncertain of the answer, there is usually an informal discussion between an ABCD representative and one or more representatives of the ASB.

The method for clarifying any ambiguities in a standard should be formalized. It has been proposed that this clarification should be the responsibility of the appropriate Academy Practice Council. We believe this is not the right answer. Because the ASB is an entity responsible to all of the sponsoring organizations, this clarification should not involve any one organization. The ASB should probably be made responsible for responding to legitimate requests for clarification. These responses should be in writing and published.

The Nature of the Disciplinary Process

We must take steps to make the activities of the ABCD more visible. We must emphasize the importance of following the principles we have laid down for ourselves, and the consequences of failure. We must move in this direction if we ever expect to transfer control of our activities away from the regulators and into the hands of our profession.

We believe an important step in this direction is the partial removal of the cloak of confidentiality under which the ABCD operates.

Under current rules, the ABCD cannot recommend discipline until after a hearing. A number of steps must take place before a hearing occurs. If matters reach the point where a hearing is scheduled, there is generally probable cause to believe that there may have been a material violation of our Code of Conduct. If matters reach this point, we believe the cloak of confidentiality should be removed, and everything occurring from this point on should be public information. Public exposure should include the hearing itself and the ABCD conclusion regarding whether there has been a material violation of the Code. If the ABCD has recommended discipline, public exposure should include the decision of each relevant actuarial organization regarding the discipline, if any, to be imposed.

We believe this approach would be a giant step towards making the members of our profession aware of the Code and the importance of following it. It would be a giant step towards wrestling control of our ship away from the regulators and into our own hands.

We are aware that the likelihood of this change at this time is remote. If we are to live with the degree of confidentiality we now have, we suggest one step that probably would meet much less resistance. We recommend that if an organization decides to impose public discipline, its announcement should describe, in detail, the actions of the subject actuary that resulted in discipline. It appears that this approach is not currently being taken. Instead, the customary process appears to be nothing more than a “tombstone notice” stating the discipline imposed.

Independence of the Qualifications Committee

As long as there are multiple actuarial organizations, the ASB and the ABCD should be independent of any one organization. This same independence should apply to the entity setting qualifications standards.

Organizational Structure

We endorse the idea of a convention to consider changes in the profession’s organizational structure. However, if the convention is to be useful, we believe it should occur after a period of vigorous activity in which organizational changes are proposed. These proposals should be subjected to comments and counter proposals. Proposals, comments, and counter proposals should be made in writing. This approach will permit options to be identified and refined before the convention.

Without this preliminary work, we fear that any convention will be concluded without significant progress towards solutions.

We believe consideration of any change in structure should reflect three basic concepts:

1. The existence of the current multiplicity of organizations reflects a history in which legitimate needs of individual groups of actuaries were not being satisfied by existing organizations. The solution, each time, was to establish a new organization that would satisfy these needs. The profession must recognize that these unique needs still exist. Each group of actuaries will always need a degree of independence and autonomy.

2. On the other hand, the maintenance of separate administrative support facilities for each group is wasteful and results in unnecessarily high membership dues. One administrative support facility should be capable of serving the needs of all groups of actuaries.

3. There should be increased coordination among the groups of actuaries. This coordination should be structured to avoid needless duplication of activities among the various groups and to avoid debilitating conflicts.

One approach would be to establish a single organization with a single administrative support facility. Then, the various groups would form divisions within the organization to serve their unique needs. These divisions would have more of the characteristics of individual organizations than, for example, the Practice Councils of the Academy. The administrative facilities of the single organization would exist to serve the individual groups, not to govern their activities. There might be five separate divisions covering actuaries working with large pension plans, small pension plans, health plans, life companies, and casualty companies. Research and educational efforts might be assigned partly to the individual divisions and partly to a central research and education facility.

An approach of this type could result in better coordination, less friction, and lower membership dues than at present.

Describing the Work of the Actuary

The work of most actuaries involves much more than the practice of actuarial science. In all areas of practice, knowledge of applicable law is essential. At least from the standpoint of continuing education, maintaining this knowledge can be more challenging and more time-consuming than staying current with developments in actuarial science.

For consulting actuaries, the recognition and definition of the needs of the client can also be more challenging than the correct application of actuarial science.

The draft report does not appear to recognize those challenges that go beyond the application of actuarial science.

We agree that we need more effective communication. However, no training in communication will be effective unless there is recognition of all the challenges facing practicing actuaries.

Membership and Fellowship

Recommendations in the draft report regarding fellowship are unclear. The leadership of COPA has mixed emotions regarding the value of establishing two levels of membership.

Particularly among consulting actuaries, individuals should not be in active practice unless they are fully competent in their areas of practice. The existence of a fellowship level that goes beyond simple membership can be interpreted as a conclusion that a mere member is not fully competent.

Obviously, it is important that every practitioner adopt a mindset in which continued growth in knowledge and skill is an important element of continued practice.

Perhaps the issue of multiple levels of membership should be on the agenda for the proposed convention.

Making a Home for Non-members

The draft report refers to making a home for individuals who are practicing in the profession but are not currently members of any actuarial organization. The intent of this reference is unclear. Obviously, a practitioner who declines membership in any organization cannot be forced into membership. Just as obviously, it is important to encourage every practitioner to subscribe to the profession’s Code of Conduct.

In the pension area, it has been suggested that the government should incorporate provisions of the Code into its regulations. This would extend the impact of the Code to those actuaries who have declined membership in any organization.

We suggest that the final report be expanded to clarify its reference to individuals who are not currently members of any organization.

Structure of the Report

It is important that every member of the profession be encouraged to read the final report. However, if the final report is as long as the draft report, this will not happen.

We urge that the report be shortened, that the executive summary be shortened, and that care be taken to consolidate all recommendations into one brief section.

The Comment Period

We can appreciate the desire to move the CRUSAP project forward. Nevertheless, having only one month to review and comment on a report that is over 100 pages long is not the way to obtain thoughtful comments. The problem is particularly acute when the relevant month includes 15 of the busiest days of the year for many pension actuaries. This short comment period simply does not provide ample time to thoroughly consider and draft comments relative to the implications of the draft report.

In fact, such a short and unfortunately timed review period lends itself to a claim that there is little desire on the part of the CRUSAP Committee to receive feedback from the profession. We believe such a claim would be incorrect. An obvious way to combat the claim would be to extend the comment period. We strongly suggest that the CRUSAP Committee do so. We suggest extending the comment period until at least January 31, 2007. We believe the Committee would receive more in-depth comments with this extended deadline.

Meeting the Needs of the Public

We strongly endorse the idea that meeting the needs of the public should be the motto and the objective of the profession. In some respects, the profession has drifted away from this objective. We need to bring ourselves back on course. We need to be certain that our professional organizations cannot be accused of functioning as trade associations.

It is important to meet the needs of those members of the public not directly involved in paying for our services. In the pension field, this means meeting the needs of all plan participants, not just the needs of the individuals responsible for approving our invoices.

Following this motto will sometimes run against the short-term self-interest of practitioners. However, following it will also drive home to our public the proposition that actuaries are professionals.

We hope that the final report will continue to endorse this motto and, to the extent possible, give even greater emphasis to it. We hope, too, that the work of the ASB and the ABCD will help the profession live up to this motto. We believe that incorporation of the suggestions made in this letter will help.

Respectfully submitted,

COLLEGE OF PENSION ACTUARIES

By Edward E. Burrows, COPA, MAAA, MSPA
Chair, CRUSAP Draft Report Review Task Force