Executives campaign against latest efforts to value pension liabilities at market rates
Public retirement systems officials are leading a campaign to oppose efforts that would force their plans to disclose their liabilities discounted by market rates.
Such a move would generally reveal higher liabilities than public plans report now. It also would lead them to scrap their diversified investment approach and to move heavily into fixed income, said Keith Brainard, Georgetown, Texas-based research director at the National Association of State Retirement Administrators, a Baton Rouge, La.-based leader of the opposition.
Most public plans currently report liabilities based on a discount rate that is a blend of their assumed rates of return.
Both the Government Accounting Standards Board and Actuarial Standards Board, in separate actions, have reviews under way to consider whether they should overhaul, respectively, their accounting and actuarial standards for pension plans. The reviews include looking at appropriate ways to measure and disclose pension plan liabilities.
GASB in April announced it would under take a comprehensive review of Statement 25 on financial reporting for defined benefit plans and disclosures for defined contribution plans, and Statement 27 on accounting for pensions by state and local governmental employers. Dean Mead, research manager at GASB, said the board aims to evaluate the usefulness of the statements in serving decision makers, investors and other accounting-statement users. GASB could begin deliberating on the issue in August, Mr. Mead said.
The Washington-based ASB plans a comprehensive review of Actuarial Standard of Practice 27 on the selection of economic assumptions for measuring obligations and is seeking public comments through Aug. 1, said Andrew Simonelli, manager-media relations. Among issues, the ASB will examine market valuation of liabilities, which is not now included in the standard.
“It is part of the information-gathering stage,” Mr. Simonelli said. “The information will determine the next step by the board,” including whether to propose revising the standard.
A number of actuaries, including Jeremy Gold, president, Jeremy Gold Pensions, a pension and investment consulting firm in New York, have been pushing at least since last year to switch to a market-value approach.
“Why are (public) pension plans upset?” asked Mr. Gold. “To me, the story is market value (measurement of liabilities) would reveal higher underfunding.”
Donald L. Kohn, vice chairman of the Federal Reserve Board, called for adoption of market valuation in a speech May 20 before the National Conference on Public Employee Retirement Systems, reinforcing the position of actuaries like Mr. Gold.
Supporting the status quo
Paul Angelo, San Francisco-based senior vice president and actuary with New York-based Segal Co., has been a leading proponent of the status quo.
“Market value introduces a new kind of volatility — liability-side volatility,” Mr. Angelo said. “It's harmful. It contributed to the demise of corporate plans. It's a theoretical problem. It doesn't describe anything happening with a (public retirement) system unlike asset volatility. If assets don't perform, contributions go up. That is a legitimate volatility. But why introduce this abstraction as if the system behaves like a bond, when the fund isn't invested (only) in bonds?”
Mr. Brainard and other public pension system representatives say because of historical record of states and local governments in honoring benefit promises, the current way public retirement systems measure liabilities is more appropriate than using market value.
State and local governments that sponsor plans exist in perpetuity, unlike corporate plan sponsors that can terminate pension plans and change benefits because of fluctuating business conditions, he said. The “idea of a freeze of pension benefits for public employees is irrelevant. The idea of us coming up with a termination liability doesn't make sense,” he said.
GASB's Mr. Mead said, “The fact they (the public and private sectors) are different isn't a reason in itself to have a different accounting standard ... or lead to a different answer. But it is a factor to consider.”
A move to market valuation could lead to public plans using a much lower discount rate, such as 4% to 5%, compared with the current 7% to 8.5%, and result in reporting higher liabilities, Mr. Brainard said.
To reduce overall funding volatility, plans would move to mostly fixed income, he said.
“Some 65% of state and local plans revenue between 1982 and 2006 came from investments,” Mr. Brainard said. ”If they had invested in a risk-free rate, it would have left a lot (of money) on the table. It would be foolish to abandon a diversified portfolio.”
The public fund groups aren't opposed to the effort because of likely higher liabilities, but rather because such a measurement would be “misleading and confusing,” Mr. Brainard said.
Obligations are obligations, some argue
Leigh Snell, Alexandria, Va.-based federal affairs representative for the National Council on Teacher Retirement, said public pension groups aren't trying to stop or inhibit either standards-setting board. They want only to ensure the process is open so they can participate. “I believe the current way plans handle this — pursuant to GASB standards — more accurately reflects plan funding,” he said.
Moving to market value could have implications for pension plan governance, plan design, benefits, funding and investment strategy, Mr. Gold said. Revelation of higher liabilities under market value would show a truer cost of retirement, Mr. Gold said. “The total affordability comes into question,” he said.
As to Mr. Brainard's claim that it would lead to less diversified portfolios, Mr. Gold said, “I think it would put pressure to go to more bond investments,” because “it would show more volatility.” But he denied that market value would necessarily shift plans to a mostly or wholly fixed-income allocation in a strategy to match liabilities. “It certainly might cause a change in investing,” Mr. Gold said. “It doesn't have to.”
A coalition of 20 groups representing officials from government, public retirement plans and unions, including NASRA, sent a letter June 17 to every member of Congress, opposing application to state and local pension systems of what the group calls corporate finance measures.
Such a move would be “inappropriate, uninformed and irresponsible,” the letter said.
State and local government pension systems “are collectively financially sound” and providing cost-effective retirement benefits, the letter said. The public pension system “is a model that should be emulated, not used to provoke taxpayer resentment, or dismissed as outdated or obsolete, particularly when the growing number of workers who will have no income security in retirement will ultimately place increased strain our public assistance programs and our economy,” the letter said.
Mr. Gold acknowledges government and corporations operations are different, but maintains their pension obligations are the same and thus should be measured the same way: “It's not because public and corporate plans are the same, but the promise is the same.”
Contact Barry B. Burr at email@example.com