By: Russ Kamp, Managing Director, Ryan ALM, Inc.

We are pleased to share with you the Ryan ALM Q2’22 Pension Monitor. Despite the fact that pension assets had another challenging quarter, pension liabilities once again fell to a greater extent, as US interest rates rose rapidly in response to the US Federal Reserve’s action to aggressively address the current inflationary environment, by raising the Federal Funds Rate by 1.5% so far. US corporate plans operating within a FASB construct are aware of this fact since their discount rate is based on market rates for AA corporates. Pension 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 and so far in 2022, as they use the return on asset (ROA) assumption as the discount rate for their pension liabilities. Under the ROA as the discount rate, it erroneously 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. The US Federal Reserve is primarily focused on combating excessive inflation. Aggressive Fed action may lead to significantly higher US interest rates. Will rising rates have a greater impact on pension assets or liabilities? Continue to check in with us at ryanalm.com to see how this story unfolds.