In Minnesota, the actuary retained by the Legislative Commission on Pensions and Retirement is placed in a somewhat difficult situation between the Legislature and the pension fund administrations. The actuary is retained by the Commission and provides services to the Commission, but the work products also have considerable value to the various pension fund administrations. The provided actuarial services include annual actuarial valuation reports for the larger Minnesota public pension funds. The findings of those reports, in part, indicate the funding condition of the applicable plans and indicate whether the annual contributions are adequate. The actuary also provides the Commission with quadrennial experience studies (for the Teachers Retirement Association (TRA), the Minnesota State Retirement System (MSRS) General Plan, and the Public Employees Retirement Association (PERA) General Plan), actuarial assumption recommendations, benefit design advice, and cost estimates on benefit increase proposals.

In producing these various reports, the actuary retained by the Commission has considerable contact with pension fund administrators, their staff, and other consultants hired by the pension fund administrations. The Commission-retained actuary spends considerable time obtaining data from the fund administrations, reviewing that data, and resolving data problems in consultation with the pension fund administrations. Preliminary report results are discussed with the pension fund administrations. Potential recommendations by the Commission-retained actuary (actuarial assumption changes and other preliminary recommendations) are reviewed by the actuaries retained by the pension funds. Under law, the cost of actuarial reports, quadrennial experience studies, and data collection is charged back to the pension plans for which the Commission-retained actuary provides actuarial reports (the various MSRS plans, PERA plans, TRA, the first class city teacher fund associations, and the Minneapolis Employees Retirement Fund (MERF)).

Given the important functions performed by the actuary retained by the Commission and the environment in which the actuary works, the Subcommittee and the Commission may wish to consider the following factors in selecting an actuarial services provider:

1. Cost of Services. Given the current budget situation, cost is an important factor, since some of the cost is borne by the Commission budget, while the remainder becomes an administrative expense for the pension funds. Expenses are a subtraction for pension fund assets.

2. Quality of Services. The services must be of high quality. To provide quality services, the actuary or actuaries working on the account must be skilled in their profession (as indicated the professional credentials indicated in the submitted materials, the experience of the actuaries in dealing with public sector clients, and input from the provided references). To provide quality service, the actuaries must not only be technically skilled, but they must be willing to take the time necessary to ensure that the data is of high quality. Any methodology, no matter how sophisticated, will be undermined by faulty data.

3. Communication Skills. The actuary must be able to explain highly technical subjects to a non-technical audience.

4. Working Relationships. The actuary must be capable of developing strong working relationships with the Commission, its staff, and pension plan administrators.

5. Independence, Objectivity. While the actuary must be capable of working effectively with pension plan personnel, the actuary retained by the Commission must remain independent of the plans. The Commission needs an unbiased source of actuarial information and advice. If the actuary becomes aligned with the interests of the groups which the pension plans often represent, that actuary has lost objectivity.

6. Understanding of Legislative Environment. To be effective, the actuary must understand the special needs of a legislative client. During a legislative session, the Commission may need advice or a cost estimate on very short notice. The Commission and its staff must be able to quickly contact the actuary. With little or no prior notice, the actuarial firm must be able to commit the resources needed to provide cost estimates within a day or two.

To assist the Commission members charged with recommending an actuarial consulting firm to be retained by the Commission, the Commission staff has assembled some questions that could be asked of the actuarial firms who are making presentations. The questions are organized into two groups. First are some general questions that could be asked of both firms. The second set are questions specific to the firm, related to concerns or issues raised by the firm�s proposal, and in the case of Milliman USA, that firm�s past working relationship with the Commission.

1. Prior Experience

• What specific experience have you had in assisting a legislative body in performing their public pension related functions? How would you characterize your approach to this type of assignment?

• What would you point to as the most important prior assignment�

  � of your firm in general?

  � in your personal experience in general?

  � in your firm�s prior public pension experience?

  � in you prior public experience?

2. Prior and Current Relationships

   • Have you had any prior or current relationships with other Minnesota public pension plans or Minnesota governmental entities? If so, would any of those relationships interfere with or impede your relationship with the Commission and your ability to provide the Commission with your best independent counsel?

   • How many other clients does your firm currently serve? If there is a time conflict in assignments, how would you determine which client would be given priority?

   • If you become involved in making a proposal for actuarial consulting services for another potential client and your firm was selected, would you inform the Commission of that relationship, and if so, when would you inform the Commission?

3. Organization and Coordination of Work

• How do you plan to organize the personnel proposed for the assignment to this project, and how do you envision the coordination of your personnel with the Commission, Commission staff, and seven different plan governing boards and administrators?

4. Compensation and Fees

   • Are the compensation rates set forth in your firm�s proposal open to any negotiation if the subcommittee selects your firm to be recommended to the Commission?

   • If, part way through the actuarial valuation process, you discover that you significantly understated your firm�s compensation requirements in the proposal and a substantial loss will be incurred in completing the valuations, how will your firm handle the situation?

5. Plan Design Preferences

• In your opinion, what are the characteristics of a well-designed pension benefit plan?

6. Communication Skill

• Explain how interest and salary actuarial assumptions increase or reduce actuarial costs. Explain how actuarial costs would be affected if the interest and salary assumptions were 8.5 percent and 6.5 percent instead of 6 percent and 4 percent.

7. Conforming to Actuarial Standards

• Do you foresee any time delays, additional computer costs or other costs to be billed by your firm to ensure your work products comply with the Commission�s Actuarial Standards?

1. Milliman USA

   Comments: Milliman USA has been retained by the LCPR for the last eleven years. During that entire period, Mr. Thomas Custis has been the lead actuary on the account, backed up by Mr. William Hogan. Both actuaries are located at the company�s Brookfield, Wisconsin office. Mr. Lance Burma, an actuary from Milliman�s Bloomington, Minnesota, office, has been a local contact and played a primary role in producing MERF and some first class city teacher plan actuarial reports. Most of the production work for the actuarial reports has occurred at the Wisconsin office.

   Given the Commission�s long association with Millman USA, the team from Milliman USA should be thoroughly familiar with the process, the plans, and the data. A risk, however, is that this long association could cause the firm to handle the work with Minnesota as part of a routine, leading to inattention and error.

   The proposal received from Millman USA indicates some important changes which the Subcommittee and Commission may wish to explore. First, the proposal indicates a change in the team that would handle the Minnesota contract, if awarded. Mr. Custis will be phasing into retirement and will play a less prominent role; Mr. Hogan will transition into the lead role. In the first year of a new contract, Mr. Custis and Mr. Hogan would jointly present reports to the Commission. In subsequent years, the reports will be presented by Mr. Hogan. The proposal indicates that Mr. Custis would be available when needed to provide input and advice to the Milliman team.

   Second, Milliman USA is proposing to limit its liability if an errors or omissions problem were to occur. Milliman is proposing that its liability for an errors or omissions problem be limited to $3 million or ten times the fee paid to Milliman in a given year under the contract, whichever is greater. Milliman is also proposing that the Commission agree that any disputes be resolved by final and binding arbitration.

   Possible questions for Milliman USA:

   1. Issues Relating to Changes in Personnel on the Contract.

      • Mr. Custis has been the lead actuary on the LCPR�s contract with Milliman and Robertson, and will now be phasing into retirement. Describe how the role of Mr. Custis would change over the course of the proposed contract, and how the role of others will change as they assume responsibilities previously assumed by Mr. Custis.

      • In the past, the Bloomington office of Milliman and Robertson performed significant work on several of the teacher plans and MERF. Describe any changes in the role of personnel at the Bloomington office under this proposal.

   2. Work Product Issues.

      Based on Milliman USA recommendations, the Commission adopted changes in PERA-General actuarial assumptions, dealing in part with predicted turnover. More recently, Milliman USA recommended changes in PERA General actuarial assumptions which partially reverse some of the earlier recommendations, and which suggest that PERA General�s problem is less serious than earlier indicated.

      • Can Milliman USA describe what happened, and indicate any changes in its processes as a result of this situation?

   3. Work Relationships; Relations with Pension Funds.

      • In the last few years there has been minimal communication between the Commission-retained actuarial firm and the Commission staff, and some concern that the team from Milliman and Robertson has been more involved in addressing issues of importance to the pension fund administrations than to the Commission. If Milliman USA is retained by the Commission in the future, what steps does the firm plan to take to improve its working relationship with the Commission and its staff?

   4. Errors and Omissions Liability Issues.

      • Why is Milliman proposing the limitation in errors and omissions coverage at this time? Is Milliman USA willing to consider increasing these proposed limits, or removing this item entirely from its proposal?

2. Edward Friend, Inc. (EFI)

   Comments: The cover letter from EFI indicates that EFI is a national employee pension and retiree health benefit consulting firm with exclusively public sector clients. EFI has provided services to the California Public Employees Retirement System (CALPERS). EFI was retained in 1992 by CALPERS, helped in establishing a staff within CALPERS to perform actuarial work, and may be continuing at this time to perform parallel valuations for CALPERS is an actuarial auditing capacity (as a check on in-house results). The company claims to provide actuarial services to approximately 80 public retirement systems in addition to CALPERS.

   EFI was founded in 1990, and is owned by three of the firm�s actuaries, Edward Friend (90 percent owner) Robert McCrory (5 percent owner), and A. Norman Crowder (5 percent owner). The firm was established out of Edward H. Friend and Company, a firm that was founded in 1961. When this predecessor is considered together with the current company, EFI, the firms have provided defined benefit actuarial services for more than forty years.

   An additional corporation, EFI Asset/Liability Management Services, Incorporated, was created in 1998. EFI Asset/Liability Management Services is a wholly owned subsidiary of EFI Actuaries. The response states that this corporate structure was instituted to formally differentiate the activities of the parent and subsidiary corporation or corporations.

   EFI has five actuarial service offices (one in Washington, DC, another in Seattle, Washington, and three more in California, Florida, and New York, respectively). The proposal also indicates that the firm would establish an office in Saint Paul, Minnesota if the firm is awarded the contract. Although EFI has five offices, the company has few employees, only 12 in total, an average of two or three employees per office. EFI states in its proposal that it uses a work structure that it calls "The Office Without Walls." The proposal states, "EFI staff works as one entity from its locations across the country. We select the individuals best suited to addressing the needs of the client and bring them to serve the client. We utilize the latest communication technology to function as a single unit from all corners of the United States." (Page 2, Tab 1.)

   EFI indicates it provides a wide range of services, including traditional actuarial valuations, open group valuations, projection valuations, simulation valuations including asset/liability studies, plan design development, benefit plan revision cost estimates, asset allocation studies and asset allocation optimization analysis, investment return measurement, pension obligation bond analysis, divorce calculations, administrative and procedural manuals, benefit comparisons, study of asset smoothing techniques, experience studies, valuation of post retirement medical programs, and general consulting services.

   Possible specific questions for EFI:

   1. Motivation for Seeking Contract/Ability to Perform Contract Requirements.

      • The subcommittee may wish to explore whether EFI, given its large client base and small staff, can commit the time and resources when Minnesota�s data become available, to begin the process of producing actuarial reports. EFI has approximately 80 public sector clients, which may include a large contract with CALPERS. EFI has only 12 employees. Given the current EFI client base and workload, can EFI provide sufficient assurances that it can handle the time commitments needed if EFI were to receive the LCPR contract?

      • EFI Asset/Liability Management Services, Incorporated, is a subsidiary of EFI. Describe what that company does, and whether there are any other subsidiaries. For Mr. Friend, Mr. McCrory, and any other personnel who will work on the LCPR contract, indicate the amount of time that they will spend providing services to EFI Asset/Liability Management Services, or to other companies or subsidiaries under the EFI umbrella, if any. In general, do the employees of EFI also provide services to EFI Asset/Liability Management Services? What is the relationship between EFI and the 12 people indicated in the proposal as its employees? Are these people providing services in a traditional employee/employer arrangement, or is EFI best considered to be a network of independent consultants?

      • Mr. Friend and other members of the EFI staff who are not involved in the CALPERS project are able begin intensive work on the Minnesota plans on July 1, according to the proposal. But in practice, the data from the Minnesota plans are not available to submit to the actuary until several weeks after July 1, and for some plans (TRA is an example) the data may not be available until the fall, possible as late as November. Will EFI be able to handle the data, at the times that they will actually become available to EFI, without compromising the quality of the data review and the quality of the actuarial reports and experience studies produced from that data?

      • To the extent that EFI has substantial commitments to CALPERS, this may interfere with EFI�s ability to provide adequate attention to the Minnesota plans. According to the EFI proposal, Mr. McCrory and presumably some other EFI staff are completing a major project for CALPERS, with an August 22 due date. The proposal states that Mr. McCrory would turn his attention to the Minnesota data review and actuarial reports after August 22. The subcommittee may wish to have EFI describe the CALPERS project or projects, and to indicate how EFI will handle the situation if the CALPERS project is not completed on time, and Mr. McCrory is not available in late August to begin work on the Minnesota pension plan data. The subcommittee may also want to know if this CALPERS project or projects is a one time commitment, or an ongoing annual project which may divert EFI�s attention from the Minnesota pension plans in every year.

   2. Prior Experience with Legislative Employer/Accessibility.

      • EFI was established to serve public sector clients, but it is not clear how many contracts EFI has or had with a legislature. You may wish to have EFI describe prior work arrangements with legislatures and the nature of the work done under those contracts.

      • Does EFI understand the needs of a legislative client, regarding confidentially and prompt turnaround, during a legislative session?

      • Given the many clients served by EFI, will EFI be sufficiently accessible during a legislative session?

   3. Coordination of Work/Data Privacy Issues.

      • EFI intends to tap specific EFI employees from across the country to work on the various public employee databases it will receive and to produce the various reports. Describe how that work will be done, how it will be coordinated, and to the extent possible, where it will be done.

      • Presumably, some private data on individuals may be shipped or transmitted across country by electronic or other means. How will this data be transported or sent? What assurances can EFI provide that private data (social security numbers, for example) will remain private.

      • Since EFI has several offices but very few employees per office (2 to 3 employees per office) how does EFI establish policies for handling or safeguarding data? How would EFI know whether these data policies are being followed at all of its offices?

   4. Nature of EFI Offices.

      • Describe how the EFI offices are organized and staffed.

      • If, as stated in the proposal, an office were to be established in Saint Paul, would it be open full time?

      • How large would the staffing be at the St. Paul office and which members of the EFI team as it is identified in the proposal would be assigned to this office? Would they be assigned here full time? What type of work would be performed here?

   5. Identification of Current Clients.

      • In describing EFI�s prior public pension experience (page 4 and 5 of tab I, "Firm Information") the proposal includes a chart of sample projects and clients. The chart (page 5 of tab I of the proposal) creates confusion about how many current clients EFI has. The chart includes dates of service, presumably when EFI provided the services described. The contract with the Massachusetts Teachers Retirement System ended in 1997, while all other contracts, including the contract with CALPERS, ended in the year 2000 according to this chart. Elsewhere, in the text of the proposal, EFI describes EFI and CALPERS as having an ongoing relationship at the current time. The subcommittee may wish to ask EFI about the nature of this chart. Have these contracts terminated, or did EFI fail to update this information prior to submitting the proposal in response to the LCPR request for proposals?

   6. General Compensation/Fees Issues.

      • Information on the fees and compensation is provided in the proposal (tab III, Actuarial Services Compensation) an in the LCPR staff summary of the EFI proposal, page 3.

      • The proposal indicates a charge of $300 for out-of-pocket expenses for travel when travel originates from offices outside of Minneapolis/Saint Paul. The subcommittee may wish to explore in more detail when these charges would apply. Is this charge limited to attendance at LCPR meetings, or would it also apply meetings with pension fund staff to discuss data issues, preliminary results or preliminary recommendations, or presentations to pension boards or similar groups, if needed?

      • If not already addressed by previous questions, does this charge apply even if a Minneapolis/Saint Paul office is created, in the event that the EFI employee doing the traveling is not stationed at this local office?

      In the flat fees for actuarial valuations and experience studies provided in the proposal, the proposal indicates that the fees include annual experience study data collection and processing, but it is unclear whether the fees include the cost of actually producing the experience study, and the revision of assumptions that stem from those studies.

      • Is there an additional expense for producing the experience studies, and for the work that follows from those studies? The subcommittee may also wish to explore EFI�s approach to experience studies. The proposal claims that EFI makes extensive use of simulation analysis.

   7. Development Cost Charges.

      EFI is proposing an additional $162,250 charge in the first year, above all other stated charges, as a development cost. EFI intends to redo the prior valuation to ensure that its valuation system is tracking with that used by the prior actuary.

      • The subcommittee may wish to ask why this step is needed, and the implications of not performing this step. The subcommittee may also wish to inquire about possible additional costs to reconcile discrepancies that occur with prior actuarial work. It is not clear whether additional charges, above the $162,250 development charge, would be imposed for that reconciliation.