It’s The Accounting Rules!

I was asked a question by the moderator (a plan sponsor) at the Opal/LATEC conference regarding the reason that DB pension systems are struggling to meet the promised benefits. Obviously, there are many contributors to this problem, but I reminded folks at the conference that the issues all start with the pension accounting rules. This subject was brought to my attention many years ago by Ron Ryan, Ryan ALM, who wrote a wonderful book on the pension crisis in which he highlights the fact that differences in valuing pension liabilities has lead to significant funding differences between corporate plans that are much better funded and all others. I would highly recommend that you spend a little time with this book to truly appreciate Ron’s point of view.

Because of the accounting rules, DB pension systems consistently underfunded their plans while simultaneously injecting more risk into the asset allocation process than was necessary. Today, multiemployer and public DB pension systems have more aggressive asset allocations than they had prior to the GFC. Market action of the last 10 or so days dramatically impacts the funded status of these systems, which may ultimately impact their long-term viability.

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