By: Ronald J. Ryan, CEO, Ryan ALM, Inc.
Well, assets had a BAD year with negative growth rates for the major asset classes:
S&P 500 -18.1%
BB Aggregate -13.0%
According to the Ryan ALM Pension Monitor, pension assets had a 2022 return of -8.7% (corporations), -7.2% (Publics), -8.7% (Unions) using the P&I asset allocation weights, which are updated annually.
But to answer the question posed above… it all depends on how a plan sponsor accounts for liabilities. FASB and IASB (International Accounting Standards Board) use market value (MV) accounting. Under ASC 715 (FASB) accounting rules, corporations are required to price liabilities using an AA corporate zero-coupon yield curve. Ryan ALM is one of the few vendors that provide these ASC 715 discount rates. Since interest rates rose significantly in 2022, Ryan ALM calculates that a 12-year duration liability schedule priced at ASC 715 discount rates would show a growth rate of -26.6%.
GASB is the accounting standard for Public pensions. GASB allows for the ROA to be chosen as the discount rate. Multiemployer pension plans use the ROA as their discount rate under ASC 960 accounting rules. The ROA is a forecast of future asset growth… and not a very good one at that. How this applies to liability growth bewilders me. How could you have a constant positive return? The ROA is certainly not an interest rate and it further ignores market conditions and volatility. Furthermore, you cannot buy the ROA to defease liabilities.
Currently, most Public and Multiemployer pensions have a ROA of 7.00% so they see liability growth at 7.00% for 2022. The differences in liability growth calculations are astounding:
ASC 715 = -26.6% ROA = 7.00%
So, to answer the question… corporate pensions had a GREAT year where assets outgrew liabilities by 17.9% based on the Ryan ALM Pension Monitor. This should result in pension INCOME which enhances EPS as well as reduce contribution costs in 2023. But Public pensions and Multiemployer pensions had a HORRIFIC year where assets underperformed liabilities by -14% to -16%. This will result in higher contribution costs in 2023.
Why do we have (allow) such a different approach to pricing liabilities? To understand the true economic reality of your funded status, it would be wise to use MV accounting just like you do on the asset side so you can compare apples to apples. This was the message from the Society of Actuaries in 2004 in their research paper titled “Principles Underlying Asset Liability Management (ALM)”.
Ryan ALM provides a Custom Liability Index (CLI) that prices liabilities at both the ROA and ASC 715 so plan sponsors, their consultants, and ALM can understand the true economic reality of liability growth and compare it to accounting valuations. The CLI should be the proper benchmark for any pension and the focus of asset allocation and ALM. Using the ROA creates confusion and results in a comparison of apples to oranges and not the desired assets to liabilities.