Proposals Could Further Erode Perceived Health of Public Pensions

Various proposals could affect reported funded levels for public pension plans, according to the first Public Pension Viewpoints by Goldman Sachs Asset Management (GSAM) Chief Pension Strategist Mike Moran.

Moran points out that the Actuarial Standards Board has proposed a revision to Actuarial Standard of Practice 4 (ASOP 4), “Measuring Pension Obligations and Determining Pension Plan Costs for Contributions,” which would call for actuaries to calculate and disclose an obligation measure to reflect the cost of effectively getting rid of the investment risk of the plan.  Discount rates to be used for this purpose could be based on, for example, U.S. Treasury Yields or rates at which the pension obligation could be effectively settled. 

ASOP 4 is applicable to all types of pension plans, but Moran says public defined benefit (DB) plans would likely be the most impacted from a disclosure perspective given the difference in the way their liabilities are calculated today–which is generally based on the long-term annual expected return of the assets (EROA).

In addition, Congress has again introduced the Public Employee Pension Transparency Act (PEPTA), which would require public pensions to report annually their applicable unfunded liabilities calculated using U.S. Treasury bond rates—rates that are “notably below the discount rates used by plans today.” Moran says this, as well as ASOP 4, would result in a higher valuation of the pension obligation and a lower funded level.

Other things that could affect the perceived health of the U.S. public DB system include ratings agencies’ adjustment of public pension liabilities and a proposal of new public retirement plan mortality tables from the Society of Actuaries (SOA). Moran says for several years, Moody’s has been adjusting reported public pension liabilities using high-quality, taxable bonds as the discount rate. Fitch uses a fixed 6% investment-return assumption for public pension liability valuation; however, the average return assumption used by public pensions is 7.5%.

The SOA’s exposure draft of new public retirement plan mortality tables generally show longer life expectancy than the average mortality assumptions used by the plans in its study. Comments on the Exposure Draft were due by October 31, and Moran says, depending on the path the SOA takes, as well as the specific assumptions currently used by a plan, this could also lead to higher pension obligations and lower funded levels.

In the Viewpoints report, Moran also discusses asset allocation changes taken by public plans and provides market insights. The report is here.