On pension fund reserves

71 Pages·04.933 MB·English

by  Garfin, Louis

on m m t o n m m mmrnm®
by
Douis Garftm
A dissertation submitted in partial fulfillment of the require­
ments for the degree of Doctor of Philosophy, in the
Department of Mathematics, in the Graduate Col­
lege of the State University of Iowa
May* 1942
ProQuest Number: 10311010
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Acknowledgement
I wish to thank Professor Henry L« Rietz
most sincerely for the encouragement and very
real assistance he has given me in the pre­
paration of this dissertation*
O0WEOT8
Chapter Rage
1 Introduction • • * • • * * * • • ♦ * « * 1
IX On the Mature of Pena ion Fund Heeerve® * 8
I. What la a Beoerv© Spstemf « • * * * *6
2« To Whom do Beserve® Belong? * * * * #8
XXX Soma Criteria For - A Reserve Baal® * » • 12
If Interpretation and Application of the
Criteria « * * * * « • • » • * * * • « %&
1* Fund® of the Saving© Bank Type # « M
2# Fund® of the Croup Annuity Type * » IS
$• Fund® of the Classical Type * * * * 20
4# Employer Contributions « * • * * * 2©
V Applications to Three Typical Funds* « SI
1* Chicago Park Employee* Annuity and
Benefit Fund * • * • « • • « • * * *32
2* Minnesota Tcachens* Retirement Fund 44
S* Mew Tork State Teacher® Retirement
System » « * * • » * • » • • • * * SI
Bibliography • » » • • * * * * • « « • * * 68
1
Chapter X
INTRODUCTION
The terms pension fund, pension system* and
retirement system* among others * have been loosely used to
mean any of a great variety of schemes for the payment of
retirement or death benefits to various classes of people*
They will be used here to mean schemes applying to staffs
of employes; the employer may be any organization* public
or private#
Rather typical of pension fund history is the
development of the New York City Police Pension Fund* Es­
tablished In 1857* it was the first municipal pension system
1
in the United States# It was set up originally due to a
desire on the part of the public to care for the f anil lies
of policemen injured or ki in the performance of duty*
but developed slowly into a superannuation or service re­
tirement plan* Th© assets of the fund were supplied from
public subscriptions and from certain city revenues which
by law were payable directly to the fund rather than to the
city treasury* FeusIons and other benefits were paid as they
matured* and since no actuarial valuations were Made * the
only indication of the progress of the fund was the amount
of these matured payments* Thus* in the early years of the
3-Buck* G. B.* "PENSION AND RFTIREMRNT SYSTEMS IN THE
UNITED STATES OF AMERICA11* Tran®#* Eighth Int*nat11 Cong*
of Actuaries* Vol* 1 (1927)* pp* 358-369*
Jhand, since no appropriation® from the city were required.
Its condition appeared to be excellent*
In 1871 provision was made for small contribu­
tions from the policemen, and in 1893 these were Increased
to 2% of salary* It was becoming increasingly evident that
the revenues were still not enough, however, to keep pace
with the ever-growing obligations* t!The city thereafter
definitely adopted the policy of making good deficiencies
by taxation*”^
year to year prospective annuitants became
more numerous. The maturing claims were doubly accentuated
by ag© and increasing disability on the one hand, and the
absence of adequate legal provisions for meeting increasing
%
liabilities on the other* Finally, in 1913 an actuarial
investigation of the fund was made, revealing for the first
time the true cost of the benefits provided* This report
and a similar report on the Public School Teachersr Re­
tirement Fund of th© City of lew York published in the
same year attracted so much public interest th© Commission
on Pensions of the City of Hew York was established to make
a comprehensive survey of th© pension funds of the City and
of pension system® In other states and In foreign countries.
A report was published In three parte In 1917 and 1918*
Subsequently all of th© lew York City pension funds were
^Report on th© Police Pension Fund of the City of Hew
York, 1913, p* 27.
SIbid., p. 31
s
reorganised on an actuarial basic*
Directly paralleling this trend of development
as it has, the pension movement in the United States is
young in comparison with European systems, but even in
Europe it is only a relatively short time since actuaries
began to take any significant part in pension fund operations*
On© reason for the lack of actuarial participation in the
early pension systems was that many of th© promoters of these
systems had no knowledge of actuarial science or of th© work
of actuaries. Another significant reason, however, is that
the actuaries themselves did not want to undertake the
work on such schemes on the ground that th© rules were so
complicated with details that reliable estimates of costs
4
were impossible* It was not until 1908 that the first
comprehensive exposition of an actuarial theory for pension
funds was published by H* W, Manly*® Within the next few
years papers were published by King and M* Lauchlan further
a
extending the subject* Bine© that time a great deal of
work has been don© on pension fund theory and the general
public is becoming more and mor© educated regarding the
costs that pension systems entail*
'^SietB, H. L. , OH THK STATUS OF CERTAIN CURRENT PF.NSI0H
FUNDS, R. A, I. A., vol. 3 (1914), pp. 33-34.
5Manly, H. W..O H THE VALUATION OF STAFF PENSION FUNDS,
J. I. A., vol. 36 (1908), p. 809.
®Klng, 0., OH STAFF PENSION FUNDS, J. I. A., vol. 39
(1905), p. 189.
H*Lauchlan, J. J., ON A METHOD OF CALCULATING THi-i
PRESENT VALUES OF PROSPECTIVE PKHSIONS BASED OH SALARY, ETC.,
T. F. A., vol. 6 (1911), pp. 8-36.
4
Although, there are many questions still unanswered
regarding th© fundamental principles upon which pension
systems ought to be cons true ted f it Is quite generally
agreed by pension fund authorities that, except possibly for
a system on a nationwide scale and involving a large pro­
portion of the population (such as th© Social Security
system for example), the only way that the soundness of a
retirement system can be assured is by the establishment of
some sort of a reserve system* The classical studies of
Manly, Ming, and M*Lauchlan presuppose a reserve basis; th©
1916 Report of the Illinois Pension Laws Commission says
that n th© reserve plan is regarded by the Commission as the
only plan by which the financial soundness of a pension fund
can. be a®stared and th© proper payments for public service
b© mad© at the time they are rendered, instead of being
left for payment at some later time, with no certainty of
their being actually paid at that timefr; and the Report on
th© Pension Funds of th© City of Mew York (Part III, 1918)
says, ^Benefits allowable on account of future service
should be provided on a reserve basis, the amounts necessary
to purchase, at the time of retirement, an employ©*s full
retirement allowance, being fttecumulated by both the city
and th© employe during the active service period of each
employ© •** With the possible exception of large scale
systems as noted above, opinion on this point remains
relatively unchanged.
5
There has been much lees agreement, however, as to
the methods to be used in calculating the amounts of re­
serves* In th© classical methods developed by Manly and King
much us© is made of rates of withdrawal from the system and
of salary scales* Due to the great number of factors which
affect these rates and their intimate dependence upon
variable economic conditions there has been a great deal of
objection in th© past two or three decades to their use In
the way In which the classical methods employ them* Indeed,
many retirement systems have been established according to
plans which do not require their us© at all* On the other
hand, there ©re still many sound pension systems whose
operations are all based, essentially, on calculations by
the classical procedures*
Th© present study is an effort to isolate those
principles of reserve calculation upon which there seems to
be more or less universal a^eement and to work out a
reserve method based upon them which will eliminate as much
as possible the features to which exception has been taken*
6
Chapter IX
OH THE HATUHS OF PENSION FUHD RESERVES
1* What Is a He serve System?
A reserve system for a pension fund may he defined
as an arrangement for accumulating in advance funds for the
payment of future benefit s. The nature of th© benefits and
th© sources from which they are to be supported are im­
portant not only in determining methods by which such funds
may be accumulated, but in deciding whether or not a reserve
system Is even desirable.
Xt has come to be quite generally accepted that
**a contributory system of annuities is th© only one which
society can permanently support.That Is, pension systems
In which th© benefits are paid for partly by th© employe
and partly by the employer are considered the desirable type,
especially in the case of funds for public employes.
Furthermore, It Is usually agreed that contributions made
by an employe belong to him and should not be forfeited
under any circumstances; hence they are simply to be held
In trust for him by the fund. For such contributions, then,
there will be no question about the amount of reserves s
the amount that must be on hand at any time on account of
the benefits which they are to furnish Is exactly the
accumulated amount of the contributions which the employe
has mad©.
1WhIttall, W. J, H., ROTES OH SOME EE CERT DEFELOP ivR PR
OF PENSION PROBLEMS IK AMERICA, J* I. A., vol. 51 (1910), pp.106 ff.