Attention, actuaries: To err is human. To cover up, plain dumb.

That appears to be the lesson from Mercer’s monster $500 million settlement of a lawsuit that alleged the pension actuary firm dug a big chunk of the $8.9 billion hole in the state’s pension funds.

Most of the reporting over the past few days has focused on the settlement, $390 million larger than any other actuarial case. And Mercer has denied wrongdoing, saying it settled to avoid losing to an unsympathetic jury in a Juneau courtroom. Alaska had sought $2.8 billion.

But the story the state laid out against the actuaries was ugly, alleging the company made egregious errors and covered them up.

Mercer had handled Alaska pension business since the 1970s. Between 1999 and 2006, it billed up to $430 an hour, collecting $2.5 million. It worked on two big retirement funds, one for teachers and one for state employees. It also estimated future health-care costs for those funds, because Alaska – unlike many state health inurance plans – pre-funded its benefits. (Medicare and Medicaid are pay-as-you-go.)

Health care was where things went wrong for Mercer. In 2002, a bad computer entry understated by $213 per person the average cost for claims by retirees who had yet to turn 65 and start Medicare.

Now no one likes mistakes, but everyone understands they happen. Mercer’s actuaries uncovered the problem before the 2002 report was released. Company execs decided not to fix it and not to tell anyone about it, according to depositions given by Mercer’s own actuaries.

And the 2003 report kept the wrong numbers because the truth (“We caught our mistake last year and sat on it.”) might cost them their engagement.

They got caught when Buck Consultants did a routine analysis of actuarial assumptions. (Most pensions do this every three to six years.) Other problems included:

  • Updating health care assumptions only every five years. Health care’s volatility demands annual updates.
  • Failing to use a health actuary for the health analysis (till Mercer’s last year on the contract).
  • Additional coding errors.

In all, the mistakes blew a billion-dollar hole in the funds, on top of the funding problems caused by the collapse of the tech stock bubble at the turn of the century. The suit against Mercer grew as more errors were discovered in later years.

Mercer’s response: The errors were immaterial. The company notes that Alaska caps increases on annual contributions to 5%, and rates hit that cap even without the billion Mercer missed.

Mercer’s insurers are on the hook for $100 million. Mercer’s parent, Marsh, sold its investigative unit, Kroll, at a loss to get the rest of the cash.

The New York Times, whence I stole my headline, summarized the case last December (via Pension Pulse). Details on the settlement come from the Juneau Empire. All of the actuarial reports, including Mercer’s mistaken ones, can be found here and here.

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