What Is a Pension Actuary?

by Josh Victor ; Updated July 27, 2017
Pension actuaries analyze, plan and devise pensions.

The broadest definition of an actuary is someone who analyzes the financial consequences of risk. A pension actuary has the task of calculating and budgeting for funding and spending pensions for retired workers. Actuaries must have excellent math, finance and budgeting skills. In addition, they must have a fair understanding of the tax code, politics and macroeconomics.

Duties of a Pension Actuary

Actuaries evaluate the possibility of different scenarios and mathematically quantify the different outcomes to create the optimal result. For pension actuaries, the same applies, but for pensions. They must use elaborate data about life expectancy, retirement age, health care costs and other information to quantify pension obligations. They must then estimate the amount of funding from current employees and the estimated investment income. Using these two sides of the ledger, pension actuaries can estimate the pension shortfall or surplus.

Pension Actuary Skill Set

Pension actuaries must be excellent math students, with the ability to calculate complex equations. They use multivariable calculus, linear algebra and other higher-level math. In addition, they must understand insurance tables such as life expectancy and retirement age and be able to incorporate those into their formulas. Finally, actuaries must be able to understand finance and investment returns over time. Intangible skills include understanding the politics, whether corporate or municipal, of pension funding and understanding the expectations of competing groups.

Faulty Pension Planning

Pension actuaries have fallen under great criticism in recent years due to faulty projections. State actuaries have projected that their annual investment returns would equate to 7 or 8 percent. However, after the financial crisis in 2008 and 2009, many pension plans produced no gains on a five- or even 10-year basis. With these new figures placed into the equation, pensions became vastly underfunded, precipitating a national crisis.

National Public Pension Crisis

Although estimates vary widely, in 2010 the American Enterprise Institute stated that there is a $3 trillion shortfall in public pensions, according to Business Insider. In 2010, groups with the largest problems included Kentucky state employees, with a 30 percent shortfall; Illinois universities, with a 30 percent shortfall; and West Virginia teachers, with a 29 percent shortfall. In addition, the combined California system is underfunded by approximately $500 billion. While it is unclear if this is due to faulty assumptions by actuaries or negligence by politicians, there is a major crisis that must be resolved.

About the Author

Josh Victor started writing in 2006 as an author for various blogs across the internet. His areas of expertise include finance, business, marketing and technology. He has a Bachelor of Arts in economics from the University of Illinois at Chicago.

Photo Credits

  • elderly men enjoying life during pension image by L. Shat from Fotolia.com