We are pleased to share with you the Ryan ALM Q1’22 Pension Monitor. Despite the fact that pension assets had a challenging quarter, pension liabilities fell to a greater extent, as US interest rates rose rapidly in response to the US Federal Reserve’s intent to aggressively address the current inflationary environment. US corporate plans operating within a FASB construct appreciate this fact. Those plans – public and multiemployer pension systems – utilizing accounting methods under GASB are probably unaware that pension liabilities had substantial negative economic growth during the quarter, as they use the return on asset (ROA) assumption as the discount rate for their pension liabilities. Under this accounting framework, it appears that pension assets dramatically underperformed liability growth.
Given the significant differences produced by these two accounting methodologies, it is no wonder that inappropriate decisions with regard to contributions and benefits are made from time to time. An aggressive Fed may lead to significantly higher US interest rates. Will this action have a greater impact on pension assets or liabilities? Check-in with us at either ryanalm.com or kampconsultingblog.com to see how this story unfolds.
It will be interesting to see what the Fed does if there’s a repeat of the 2013 “Taper Tantrum.”
I’m sure that there will be a temptation to stop addressing inflation, but that will only further exacerbate the situation. Investing involves risk – when are we going to remind investors of that?