Ryan ALM is out with their second quarter pension scorecard, and things aren’t that bad so far in 2018 despite lackluster asset class returns. Ryan ALMs asset mix produced only a 1.09% return for the six months, which would look quite weak if we were just focused on the return on asset assumption. However, when viewing asset returns relative to a plan’s liabilities, the correct objective, asset performance looks pretty attractive. How’s that?
Liability growth has been negative for the first six months when looking at more appropriate valuation criteria. In fact, under FAS 158 (ASC 715) liabilities are down -6.63% through June 30th. On a mark-to-market basis using Treasury STRIPS, liabilities have generated a -2.89% return. It is only using the GASB methodology that allows for the use of the ROA as a liability discount rate do we get a positive number for the first half at 3.75%.
Public pension plan executives and their boards must be wringing their hands quite a bit thinking that funded ratios are falling when in fact the first half of 2018 is not that bad when using a mark-to-market accounting. According to Ryan ALM, plan assets have exceeded liabilities using Treasury STRIPS by 4.0% during this period.
How about requesting (requiring) public pension systems to use multiple discount rates to measure liabilities so that the sponsor and their board have a full picture of how plan assets are doing versus the promise that has been made. Inappropriate decisions may just be taken without a true understanding of how things are stacking up.