Recently I had the opportunity to speak at the Financial Research Associates’ conference in NYC on non-traditional fixed income. I had the pleasure of participating on a panel with an industry icon – Ron Ryan, Ryan ALM He and I presented on the topic “Taking a Close Look at the Liability Beta Portfolio”. However, before presenting our views on the proper use of fixed income in a defined benefit plan, especially in a low interest rate environment, Ron and I addressed the unintended consequences from accounting rules, both GASB and FASB, that have lead to an under-reporting of plan liabilities and an overstatement of plans assets. Given both, it is obvious that funded ratios are overstated, too.
The IASB (International Accounting Standards Board) has moved to a mark to market accounting of both pension liabilities and assets. It isn’t too far fetched to believe that the US will adopt these same standards in the near future. Unfortunately, since GASB uses the ROA to value plan liabilities, it becomes clear as to why the pension community continues to focus on the asset side of the equation instead of the liability side, which should be driving asset allocation and investment structure.
Attached for your review is our presentation. We encourage you to reach out to us if you have any questions or challenges.