Your editorial of July 12, “Raising the standard,” made one statement that I and many others don't agree with, and posed a question to which I would like to respond.
I cannot agree that the current and proposed Governmental Accounting Standards Board standards for public pension plans do not reflect economic reality. I assume you were referring to the rate of interest assumed in determining the present value of benefits to be paid in the future. These benefits will be paid from the assets on hand at the time they come due. To assume in advance that those assets will be different from those currently held seems to me to be a stretch. So does the notion that fund assets will earn something far different from typical historical returns. If a fund is not now invested in “safe” fixed-income securities, and without known plans to make a change in asset allocations in the future, why would a trustee choose to assume something that, in fact, does not reflect current reality? Being conservative is one thing, but one can do that and still be a practical and responsible fiduciary. Why base a valuation on a level of contributions that is fictional? Contributions that are recommended by the plan's actuary, based on reasonable assumptions, are what we should all be looking at in measuring fund adequacy. Forget the fact that the last 10 years have not been good to the stock market — this, too, will pass, as it has many times before. If not, we will have lots of other problems to face that will make us forget all about very long-term pension liabilities.
You also posed an interesting question — why are public and private pension accounting standards different. I have wondered about that, too, for many years. But I think GASB has it right, not the other way around. GASB hasn't changed as much because its rules made more sense. The Financial Accounting Standards Board started with all of this because it wanted to compare companies' pension plans to help investors. A lot of good that did us — anyone who can look at a corporate income statement or balance sheet and fully understand the effect the pension plan has vis-à-vis some other company has my deepest respect. Most of us can't do that.
GASB's approach is simpler and more easily understood. I for one hope it stays that way.
I have been a consulting actuary for many, many years and have always felt that the accounting world has been creating solutions and then looking for problems to apply them to. At least in this case.
Hilton Head Island, S.C.