Should Aspiring Actuaries Consider a Career in Pensions?

By Jason Russell, F.S.A.
Horizon Actuarial Services, LLC – Washington, DC
UNC Class of 2001


Even in this challenging job market, there are many career choices available to college students who are aspiring to be actuaries.  Actuaries work in many different fields, the most common being life, health, pensions, and property and casualty.  Actuaries also work for many different types of organizations, such as insurance companies, consulting firms, financial institutions, or the government.

My actuarial work experience began in 2000 as an intern at Blue Cross Blue Shield of North Carolina, the state’s largest health insurer.  I really enjoyed my time at BCBSNC, but I wanted to try something different after graduation.  Consulting in particular really appealed to me.  So, after graduating from UNC in 2001, I began working as an actuarial analyst with Watson Wyatt Worldwide in Washington, DC.

At Watson Wyatt, my job focused on consulting with Fortune 500 companies on the risks associated with their pension plans.  I worked on pension plans that had billions of dollars in assets, providing benefits to tens of thousands of employees and their beneficiaries.  I worked at Watson Wyatt for nearly seven years, and my time there was very rewarding and challenging.  I would encourage any aspiring actuary who could get the same type of experience I did at Watson Wyatt to do it and never look back.

It is important to note, though, that I began my career as a pension actuary in 2001.  In the past ten years, many things have changed with the career outlook of a pension actuary.  If you are considering beginning a career as a pension actuary now, you should be aware of how the outlook for pension plans has changed, and how it may continue to change in the future.

DB Plans and DC Plans

First, it’s important to understand the basics.  There are two basic types of retirement plans.

The first is a defined benefit (“DB”) plan, which is also called a pension plan.  With a traditional DB plan, a company makes a promise to its employees to pay them benefits after they retire and for the rest of their life.  By offering a DB plan, a company can help ensure that its employees will have enough income to live adequately in retirement.  This encourages healthy and orderly turnover in the workforce.

When a company sponsors a DB plan, it bears all of the investment risk and mortality risk associated with funding the retirement benefits it has promised to its employees.  For example, if there are losses on the plan’s assets, or the employees live longer in retirement than expected, the company will have to pay more money into the plan.  This is exactly why companies hire pension actuaries as consultants – to help them evaluate and manage those risks.

The second type of retirement plan is a defined contribution (“DC”) plan, which is basically a savings plan.  With a DC plan, a company simply makes a contribution to its employees’ accounts, and the employees are usually responsible for investing those contributions to save for retirement.  In general, there are very few risks to the company associated with sponsoring DC plans, so actuaries don’t usually need to get involved with them.

When an employee retires, it’s best for him or her to have income from three different sources – a DB plan, a DC plan (or other personal savings), and Social Security.  These three sources of income comprise the so-called “three-legged stool” of retirement.  If a person has just one or two of the three “legs,” navigating retirement can be much more difficult.

The “Perfect Storm”

In the 1990s, economic outlook was strong, and financial markets were posting double-digit returns year after year.  In this decade, most DB plans were very well funded.  Many companies took “contribution holidays” (skipped paying money to the plan) and/or improved benefit levels because their plans were so overfunded at the time.

In the 2000s, however, the landscape for DB pension plans changed considerably.  There were significant investment losses in 2000 and 2001, and after a few years of generally positive returns, 2008 saw the biggest market collapse since the Great Depression.  Many DB pension plans that were overfunded in 1999 (and may have improved benefits as a result) founded themselves severely underfunded in 2009.

Amidst the volatility in the financial markets, accounting standards and funding rules for DB pension plans were made much more rigorous.  Under the new rules, companies have to recognize costs and make contributions to DB plans at a more accelerated pace than they ever had before.

All this has created a “perfect storm” to the detriment of DB plans.  As a result, many companies have decided that the costs and risks associated with DB plans are too much to bear, and they have started to move away from them, usually in favor of DC plans.  As companies shift away from DB plans and toward DC plans, there is less work for pension actuaries.

Considerations for Aspiring Actuaries

What does all of this mean for aspiring actuaries who are considering a job in pensions?  Should they change course entirely and focus on other lines of work?  In my humble opinion, no.  There are still excellent jobs out there for pension actuaries.  However, given the changing landscape, it is important for jobseekers to ask the right questions of their prospective employers.  (I note that this applies to any field, not just pensions.)

The following is a list of points that an actuarial student might want to consider when deciding whether to take a job in pension consulting.

1. Not all companies are getting rid of their DB plans.  The newspapers always report stories when a big company decides to freeze or terminate its DB pension plan.  However, they very rarely report a story when a different big company decides to keep its plan.  It’s true that many companies have decided to move away from DB plans, but it’s also true that many have decided to keep them.  If you are interviewing with a consulting firm, ask about the decisions its clients have made with regard to their DB plans.

2. A company’s transition away from its DB plan will take several years.  It is important to understand the different ways a company may chose to exit its DB plan.  For one, a company may simply “close” its DB plan to new employees; current employees will continue to earn benefits under the DB plan until they retire.  Or, a company may “freeze” its DB plan so that no current or future employees will earn benefits under the plan going forward.  Only in very rare cases (such as bankruptcy) will company a “terminate” its DB plan.  When a company closes or freezes its DB plan, actuarial consulting will still be needed for the next few decades as the company’s employees approach and then enter retirement.  However, the client’s need for special studies may diminish over time as a closed or frozen plan matures.

3. Consulting firms remain busy.  Regardless of any decisions their clients may have made to close or freeze their DB plans, many consulting firms have not seen an appreciable drop in their business.  These tumultuous economic times have resulted in companies requesting more special studies from their consulting actuaries.  At the same time, routine work remains strong.  Therefore, we have seen that most consulting firms continue to hire a steady stream of new analysts each year, even while other actuarial employers may be scaling back in the down economy.

4. Consulting firms can offer career paths outside of pensions.  Given the changing landscape of pension plans, many consulting firms are broadening the services that they provide to their clients.  In that vein, those firms may give actuarial analysts who are initially hired to work in pensions opportunities to branch out into other lines of consulting, such as health care or executive compensation.  If you are interviewing with a consulting firm, you should ask whether such practice-rotation programs are available.  It may be that you find a great career focusing entirely on pensions, but it is nice to have options to make yourself a more well-rounded actuary and consultant.

5. Will DB plans make a comeback?  As more companies shift toward DC plans, more of the burden will be placed on the individuals to save for their retirement.  This will lead to more people working past the ages at which they normally would have retired, simply because they can’t afford to retire on their savings and Social Security alone.  Will there be a shift back to DB plans after it becomes apparent that DC plans aren’t a sufficient means to provide for retirement?  Right now, some small companies are actually starting brand new DB plans.  Will the trend continue to large companies, too?  Will Congress offer incentives to companies to offer DB plans?  I wouldn’t count on any of this happening, but I also wouldn’t rule it out.

6. Consider the big picture.  Of course, long-term career outlook is a very big factor you should consider in deciding where to take your first job as an actuary.  There are other factors as well.  You may find that you like the people or the fast-paced nature of working at a consulting firm.  Perhaps on the whole, those other considerations will override the concerns you have about the long-term outlook of pensions.  You may also find that the experience you gain working at a consulting firm will be very adaptable if you decide to change career paths, which you should always consider as a possibility.

Of course, as a pension actuary, I am biased.  But I do believe that some of the best jobs for actuaries are still in pensions.  My advice to you is to proceed with a little more caution and to ask good questions from your prospective employers when deciding if a job in pensions is right for you.

Good luck with your career search, Tar Heels.