By: Russ Kamp, Managing Director, Ryan ALM, Inc.
What a year! Inflation is rising, interest rates are rising, and asset prices are falling. What does this mean for Pension liabilities and pension funding? Well, it is very much dependent on the accounting rules that your plan follows – GASB or FASB.
We are pleased to share with you the Ryan ALM Pension Monitor for 3Q’22. As you will read if you are a corporate plan sponsor you aren’t nearly as upset with the asset price declines given that liability growth has plummeted (-25.9%) versus an asset deterioration of “only” -12%. As a result, corporate America is actually witnessing improved funded ratios so far in 2022.
On the other hand, sponsors of public and multiemployer pension plans are tremendously upset given the accounting rules under GASB which have the liabilities being priced at the return on asset (ROA) assumption (+5.6% YTD assuming a 7.3% ROA). In these examples, the average public pension plan’s asset growth is trailing liability growth by -17.5% while multiemployer plans have a meaningful shortfall of -18.5% YTD. Funded status and funded ratios are plummeting.
We won’t get into the fact that plans outside of the US operate under the IASB standards calling for even more conservative pricing of pension liabilities similar to FASB (market yields for high-quality bonds). Confused yet? Why we have two different accounting methodologies for discount rates on US pension plans doesn’t make any sense to me. In a year such as 2022, the significant differences impacting funded status will drive very different decisions. In the case of Corporate plans, improved funding will reduce contribution costs and should encourage greater derisking. With regard to public pension and multiemployer plans, the deterioration in funded status may lead to plans getting more aggressive. Which action is correct? Ryan ALM’s highly experienced team of LDI/CFM experts will gladly assist you in thinking through these issues. We welcome the opportunity!