Chapter 13

THE VALUE OF THE ACTUARIAL PERSPECTIVE AND “THE REST OF YOUR LIFE”

Throughout this book, I have talked about how individuals, organizations, and even society in general should be considering Present Value when facing important (and not so important) decisions. It may seem, at times, that I am suggesting a perspective that is in some way revolutionary or “brand new.” In fact, actuaries have been using Present Value for more than a century, and the questions that they address with that perspective are both important and affect almost everyone. Space does not allow me to describe the efforts of the many actuaries who are using Present Value to make things better, but I don’t want to end our discussion without talking about two actuaries who are making a real difference in people’s lives—one who focuses on the decisions individuals make and one who consults with the organizations for whom millions of us work. While the 5-step process for using Present Value lies behind almost all of what we as actuaries do, in this chapter I want to focus on the results of that work and talk about the true power of Present Value to make the world a better place.

Planning for the Future—The Role of Present Value in Improving the World

“As senior actuaries you should be excited to be practicing at a time when the country, and the world, is facing the most serious Retirement Income crisis we’ve seen in our lifetimes. Your knowledge and skills are exactly what the world needs now.”

Gene Wickes, FSA, EA, and Global Retirement Leader of Towers Watson to the firm’s most senior actuaries

The first time I met Gene Wickes was during the telephone company consulting project I talked about in chapter 7. As you recall, my old firm, Godwins, had been hired by a consortium of about a dozen regional telephone companies (Pac Bell, Bell Atlantic, GTE, etc.) who were collaborating in an effort to get the FCC to let them raise the rates they were charging AT&T (who provided all the long distance service) to use their phone lines. Now, these telephone companies were, by themselves, big corporations employing tens of thousands of employees each, and collectively they represented well over 100,000 employees as well as billions of dollars in assets and liabilities. Each of the companies had sent three or four executives (VPs from HR, finance, and regulatory affairs as well as more than a few lawyers) to an initial meeting to represent their particular interest and to plan their strategy.

The meeting took place in a huge conference room in the plush Washington, DC, offices of the industry’s main lobbying organization (the United States Telephone Association “USTA”) and there were nearly fifty people gathered around the largest conference table I had ever seen.

As I walked into the room, at that point, a young and relatively inexperienced actuary who had (with lots of help) basically bluffed his way into this assignment, I was more than a little intimidated. There clearly was a lot at stake. Everyone around the table was counting on me and my firm to deliver the analysis that would enable the companies to convince the FCC of their rights to AT&T’s money, and at that point I had no idea of not only what our analysis would show, but also how we would actually perform it. It was a scary moment.

The only comfort I thought I could rely on was that I would be the only actuary in the room and therefore would be able to discuss actuarial aspects of the project from a position of some authority. Only I wasn’t. Sitting several seats down and across the table from me was Gene Wickes. Of the twelve telephone companies who had decided to bring their most important individuals to attend this meeting, only one decided to send their actuary. Every one of the companies had an actuarial firm responsible for their benefit programs (and sometimes more than one), and every one of the actuaries involved knew about the effort with the FCC, but only Gene was viewed as an important enough advisor to his client—US West, the telephone company in Colorado—to be sent to this meeting.

What was even more remarkable than Gene’s presence as trusted consultant to the US West contingent was the fact that during the three-hour meeting on issues ranging from coordinated regulatory strategy to the assumptions and methods that we were going to use in our actuarial analysis, Gene never said a word. His silence told me two things about him that I would see manifested again and again in the years following. First, his relationship with his client was so good that US West was obviously willing to pay a great deal of money for him to simply observe and listen to the discussion, and second, he was so entirely focused on the group getting to the right answer that he was willing to put aside his ego and, unlike 99% of the consultants I know, not feel the need to voice his opinion when he felt that it would not contribute meaningfully to the objectives of the group as a whole.

In the twenty years after that first meeting, I came to know Gene very well as a colleague, a competitor, then as my manager, and finally as the global retirement leader of the firm where I currently work. In that time, my respect and admiration for him has continued to grow as I have watched him take on bigger and broader challenges each step of the way. To my mind, Gene epitomizes the way actuaries can use the power of Present Value and the actuarial perspective in general to help make the world a better place.

With a degree in math and economics from Brigham Young, Gene came to the profession with somewhat less formal mathematical training than many actuaries, but in all my years I have never seen an actuary who can absorb a technical piece of analysis as quickly and completely and, far more importantly, be able to hone in on the key results and communicate those results clearly and effectively in plain English to his clients and the public at large. As a devout Mormon, Gene also brings to his work an orientation that, while not exactly “mission driven,” is based on a rock solid moral foundation, extraordinary integrity, and a belief that as actuaries we should be looking at all times to do the “right” thing and use our skills in a way that will help make the system better for all.

Gene has done many things in his career, has helped some of the largest companies in the world manage their retirement plans, and currently sets the direction and oversees the efforts of over 2000 actuaries at Towers Watson. Right now, he is focusing his efforts on bringing to bear the resources and expertise of our firm to address one of the biggest Present Value problems facing this country—and the developed world in general—today. Specifically, he is concerned with how to fix a global retirement system that is badly broken and threatens to cause enormous suffering and distress to millions of people who will, within the next few decades, be too old to work and yet not have enough to live on for the rest of their lives. Theoretically, in the United States (as well as most other countries), retirement income is supposed to be provided through a “three-legged stool” representing a combination of employer sponsored retirement plans, Social Security, and personal savings that an individual has set aside from his or her own funds. Unfortunately all three of these legs are falling short of their goal. The US Social Security system is facing long-term massive deficits and will likely need to be cut back, employers have sharply curtailed their retirement plans, and individuals have not been able or willing to set aside enough of their current income to provide for their future needs.⁵⁷

This is an extremely complicated problem with many aspects. Clearly, the health of the US Social Security system is a key piece of the puzzle, as well as the failure of individuals to save enough. Both of these problems have Present Value at their core. In the case of Social Security, the fact is that the US government has not paid sufficient attention to their own actuaries and the Present Value analyses they have been producing every year since the system was introduced. The problem of individuals and their behavior is something we will talk about shortly, but where Gene and his actuaries are focusing their efforts and are having a big impact is among company-sponsored retirement plans.

Over the last twenty years, companies’ commitment to providing retirement benefits to their employees has declined significantly. Pension plans have been frozen and terminated and company contributions to 401(k) plans and other defined-contribution retirement plans have not made up the difference.⁵⁸ Part of this trend has been driven by companies taking advantage of the high personal rates of discounts that most people have. Many companies with some justification say that they are only trying to be “efficient” and get the most employee relations “bang” for their compensation “buck” and giving $1 of extra salary is more desirable to the average employee than putting an extra $2 into the pension plan. Essentially, they have used Present Value to create a “win-lose” situation with their employees. While this is arguably a case where Present Value has been misused and one that does society long term harm, it’s hard to blame either the company or their employees for the result. Perhaps we should blame the actuary for not educating both parties as to how to use Present Value along the lines we have seen throughout this book.

One silver lining in the financial crisis of 2008–2009 is that in its aftermath many more people do realize how important step 2 of Present Value thinking is (imagining all the possible futures) and now have a better appreciation for the value of a guaranteed pension plan, but this dawning realization may have come too late.⁵⁹ As of 2010, over a third of all big companies who traditionally provided pension benefits to their employees had either frozen or terminated their plan and few of them, even with the greater awareness and desires of their workforce, have any appetite for reopening the plans.⁶⁰ Even worse, the new, largely high-tech companies that have grown explosively in the last few years employing greater and greater numbers of people, show very little interest in implementing new pension plans. The reason there has not been a resurgence in pension plans is related to the second cause for the exit of companies from the business of providing guaranteed pensions in the first place. Specifically, when companies do a Present Value analysis they come to the conclusion that the risk (investment, mortality, etc.) associated with providing a pension plan, at least the way it has historically been done, argues strongly for doing away with and/or staying away from sponsoring pension plans.

But Gene has helped companies look more deeply into those risks, do a better job imagining, and then evaluating the possible futures as well as identifying many of the non-financial aspects (both positive and negative) of providing (or not providing) pension benefits. Thus he and his colleagues have essentially used a much more sophisticated Present Value analysis as well as creativity in plan design to develop “win-win” ways of providing guaranteed lifetime retirement income promises (the essence of a pension plan) with only limited risk to the company’s financial health.

Gene has led the charge by personally implementing new plan designs and financing strategies at dozens of companies and teaching the rest of the actuaries in the company how to do so with their clients. At the same time, Gene has been instrumental in spreading the word in the business community about the negative Present Value impact of not putting in a pension plan. Specifically, he notes time and again how the failure to provide employees a dignified and financially acceptable way of leaving the company will create a mass of “hidden pensioners” on the company payroll—large numbers of employees too old or sick to be productive, yet unable (due to a lack of a pension) to afford to retire. Without a way out, these hidden pensioners hang on to their jobs, bloating the payroll, reducing the overall productivity of the company, and stifling advancement opportunities for younger employees.

As Gene points out, there are risks in every approach—the key is for companies to understand those risks, determine which ones are most critical to their organization, and take steps to manage the ones that are unavoidable. He makes a very compelling case that for many—if not most—companies, those steps include providing a pension plan.

Only time will tell whether he will succeed. In the meantime, Steve Vernon is leading the charge in addressing the problem from another perspective—that of the vast number of individuals trying to figure out whether and how they will ever be able to retire and more generally how to map out their financial future.

Helping the Individual—How to Plan for the Rest of your Life

“How much money do you need and how can you make it last?”

Steve Vernon, FSA, President of Rest-of-Life Communications, from his book Money for Life

And isn’t that the key question that all of us ask ourselves all the time, not just as we are planning for retirement, but anytime we contemplate our financial situation? In this book, I have consciously avoided addressing the most common retirement and financial planning questions that we face. That may seem to be an odd decision for an actuary who has spent the last thirty-five years working with retirement plans, but the reason is quite simple. Those questions have already been written about eloquently and accessibly by someone in a way that provides all the guidance that anyone needs to make those important decisions, and I have very little to add to what Steve Vernon has said on the issue. The quote above is from one of Steve’s books that is nominally about managing one’s assets and income after retirement, but what he says can be viewed more generally and not just about retirement. As the name of his company suggests, Steve is focused on how we all manage “the rest of our lives”: about what we need today to make sure we have enough in the future. In other words, he is talking about Present Value.

For over thirty years, Steve Vernon worked as a consulting actuary and for much of that time he and I worked for the same company, designing and redesigning pension plans as well as assisting our clients with the financial, compliance, and administrative challenges associated with those plans. During those years, Steve and I collaborated on numerous projects, and I always found him to be an extraordinarily quick study, uniquely creative in his thinking, but more than anything, a great communicator of complex topics to people with less expertise or technical knowledge than him. Steve is a gifted writer, and his books (he has written five) are remarkable in their clarity and flow. He makes actuarial concepts and retirement issues in general easy to understand and downright fun to read about.

I first became aware that Steve was heading in this direction when it was announced at a regional meeting of the senior actuaries that Steve was going to be working part time for several months in order to finish the book he was writing. This was the first time I had ever heard of an actuary writing a book for the general public. It seemed like a quixotic venture, and knowing Steve’s creativity and ability to write well, I was very curious to see what would emerge.

His first book, Don’t Work Forever,⁶¹ laid out, in clear and simple terms, basic actuarial concepts and the notion of planning for retirement in a way that anyone could understand, and his second book (Live Long and Prosper⁶²) expanded on the concepts to lay out a map and a thoroughly practical approach that can be used by people in their forties and fifties (and even younger) to make important choices about the rest of their lives. It was the first book that I had ever read that applied actuarial principles to thinking about all the issues that face us as we age and consider our money, health, family, as well as all the things we want to accomplish before we die. Not only that, but as an actuary with no agenda and no “product” to sell, his book contained guidance that was both insightful and completely unbiased. I started recommending the book to any and all friends who came to me looking for financial planning advice or recommendations for a financial planner to consult.

It was clear to me that Steve had found his new calling and that it would not be long before he left the actuarial consulting world. So I was not at all surprised to hear that in 2006, at the ripe old age of 53, Steve decided to retire from Watson Wyatt and start up his own consulting firm with the thoroughly appropriate name, Rest-of-Life Communications. He had seen a desperate need for millions of people for clear and unbiased advice on what to do as they faced the frightening prospect of aging without the resources, knowledge, or plan to enter this next phase of life.

At one point, I asked Steve how he planned to make any money with his new venture, given that he was not going to take commissions or sell any investment products, and the people who (desperately) needed his help didn’t have the money, the understanding, or the motivation to pay for his time. He told me that he had no expectation of directly making money on his advice (at least in the short term), that he thought that what he had to say was important, and that he hoped that somehow it was going to work out, either through companies doing the right thing by hiring him to talk to their employees or finding some other revenue source to subsidize his writing and speaking.

Anyone who Googles Steve will see that his faith in what he has to say has been rewarded. His five books on retirement planning⁶³ are selling well, he has a regular blog on CBS MoneyWatch, he is a sought-after lecturer, and most recently he has been hired by Stanford’s Center on Longevity as a Consulting Research Scholar to continue thinking, creating, and writing about how we all can make the rest of our lives as long, healthy, and productive as possible.

To me, Steve Vernon epitomizes the importance of the actuarial perspective and the power of Present Value. While he never uses the term explicitly, the concept lurks behind all the great advice he provides on making those decisions that will inform and improve the “rest of your life,” and I advise anyone who has enjoyed this book to pick up a copy of one of his.

A Final Word on How Present Value Can Make All the Difference

In 1994 I met a woman who changed my life. Visiting friends in Berkeley over winter break, I first set eyes on Tali at a Chinese restaurant on Christmas night. Dark, brilliantly creative, intense, deep, and frighteningly beautiful, I was immediately smitten, but with so many others at the table we had only the briefest opportunity to talk. It was several months before I was able to find my way back to Berkeley again, but when I did, during the summer of the following year, I engineered a reintroduction and got to know her a bit more.

Tali had come to San Francisco in 1989 from Israel, arriving just in time to experience a major earthquake that wrecked the neighborhood to which she had just moved six days earlier. Her life in Israel, as well, was as different from mine as could possibly be imagined. As a seven-year-old child in Jerusalem, she spent most of the Six-Day War hiding in a bomb shelter with her mother and two brothers while the battle for the city raged on above their heads while her father was in the Sinai Desert fighting the Egyptians. The fact that her father had spent his childhood in Egypt and was fighting against soldiers with whom he had grown up only made it harder for Tali to make sense of the chaos and irrationality that surrounded her.

By the time we met, Tali had just gotten a PhD in psychology to go along with her other graduate degrees in philosophy and art as well as a tour of duty in the army, several months in an Israeli military jail for refusing to carry a gun, and the better part of a year spent living on a kibbutz that produced decorative flowers for florists around the world and plastic wrapping for meat products found in supermarkets. Her perspective on the world in general and the future in particular was, to say the least, informed by a different literature and a different set of experiences than mine.

A woman like Tali had no shortage of suitors and the competition for her attention was fierce. Given her attitude toward the future (I would eventually learn that one of her favorites phrases is “why not now?”) and her clear desire for a family, I knew I had only a small window of opportunity to make my case.

Almost immediately, I was put to the test as on our very first date she told me that with her almost-empty bank account and massive student loans she was worth “negative $100,000” and asked me whether that was going to be a problem. Knowing the pressure was on, I performed the fastest (and most important) Present Value calculation in my life. In addition to guessing that the Present Value of her future earnings as a psychologist was much more than the $100,000 she owed the bank, I imagined the possible futures and realized that the Present Value of the benefits of having a life with Tali was so large as to make the choice absolutely clear. Even then, however, I sensed that we spoke different languages, and she might not fully understand my reasoning, and so instead of explaining, I simply answered her with a straightforward, “Not in the least.”

It was the best decision of my life and a Present Value calculation that I have never once had cause to regret.

At the end of the day, we all must live in the present and move into the future with as little fear and as much awareness as we can manage. We really have no choice. I often think about life as a hike on a trail in the mountains that we take in the middle of the night equipped only with our senses, what we can carry on our back, and perhaps a small flashlight that we can use to see a few feet in front of us.

Think about Present Value as that flashlight. Keep it close, use it often, and focus its beam where it can best illuminate the places where the trail is rough and the way forward is unclear. I can’t promise that you’ll never choose the wrong path, but if you shine it on the right spots, at least you’ll know where you are headed and why.