GASB 67 – Is Your Pension Plan Ready?

Recent GASB 67 accounting changes may re-price liabilities at a higher valuation thereby causing higher reported pension deficits. Moody’s rating agency has decided to price liabilities under FASB guidelines, which lowers the discount rate and increases liabilities above the GASB 67 valuation.
New Issues for Plan Sponsors:
1. It is estimated that GASB 67 accounting rules will increase the public pension deficit by 30% to 60%
2. Plan sponsors must deal with the blow-back from GASB’s calculation of Asset Exhaustion and Net Pension Liability
3. Moody’s has decided that GASB isn’t strict enough, and, as a result, they’ve proposed to base the credit rating on an AA corporate discount rate (FASB)
4.Moody’s approach increases the GASB pension deficit, while potentially negatively impacting a US state’s borrowing cost and credit rating
Taking the first steps to help your plan offset the impact of GASB 67 and any funding deficits is difficult. However, we have a roadmap for success for plan sponsors.
Solutions:
1. Install a Custom Liability Index (CLI) as the plan’s proper benchmark
It is hard to beat an invisible or unknown opponent. A plan sponsor needs to know the size, shape, growth rate and interest rate sensitivity of their liabilities in order to devise a strategy to have assets outgrow liabilities. Since every pension plan is different, only a CLI could provide the monthly calculations needed for the asset side to function.
2. Asset Allocation should be responsive to the Funded Ratio
The objective of a pension plan is to fund liabilities such that contribution costs are low and stable as a % of payroll. A high funded ratio should have a much different asset allocation (AA) than a low funded ratio. Most AA models are strategic or static and do not respond to the funded ratio. A responsive AA is required, and one that is updated frequently.
3.Monitor Asset Growth vs. Liability Growth
Traditional performance measurement systems monitor assets vs. an asset benchmark (generic market index). This is really measuring assets vs. assets. What is required is a measurement of total assets vs. total liabilities (as measured by the CLI). If you outperform generic market indexes but lose to liability growth – your plan loses!
Allow us to help you! We have too much to lose as a society if we fail to preserve these critically important retirement vehicles.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s