US Public Pensions Subject to Accounting Changes Under GASB Proposals

The Governmental Accounting Standards Board (GASB) has published proposals to improve the way US state and local governments report pension liabilities.

(July 10, 2011) — The Governmental Accounting Standards Board (GASB) has issued proposals to improve the way public pension funds in the United States report their liabilities

“Users of state and local government financial reports have told the GASB that current standards do not provide enough information to adequately understand the cost and the liability for benefits promised to active and retired employees,” GASB Chairman Robert H. Attmore stated in a release. “The proposals contained in these Exposure Drafts are the result of years of research and extensive deliberations by the Board to address these issues and make financial reporting of pensions more transparent, comparable and useful to citizens, legislators, and bond analysts.”

He added: “It is important to note that these proposals relate to accounting and financial reporting, not to how governments approach the funding of their pension plans. Pension funding is a policy decision made by government officials.”

As investors have raised concerns that unrealistic expectations of investment returns have concealed the actual size of many unfunded pension obligations, the proposals aim to change the formula that schemes use to determine the value of their pensions. The proposals by GASB would require public pensions to highlight net unfunded liabilities on their balance sheets. As outlined in the release, GASB asserts that governments should be required to report a net pension liability, or the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside to pay benefits to current employees, retirees, and their beneficiaries. Specifically, proposed changes to how a government would calculate its total pension liability and pension expense include:

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  • Immediate recognition of more components of pension expense than is currently required, including the effect on the pension liability of changes in benefit terms, rather than deferral and amortization over as many as 30 years which is common for funding purposes.
  • Use of a discount rate that applies (a) the expected long-term rate of return on pension plan investments for which plan assets are expected to be available to make projected benefit payments and (b) the interest rate on a tax-exempt 30-year AA-or-higher rated municipal bond index to projected benefit payments for which plan assets are not expected to be available for long-term investment in a qualified trust.
  • Requiring governments in all types of covered pension plans to present more extensive note disclosures and required supplementary information.

Final rules are expected out by July 2012.

Read “Pension Quandary: Valuing Liabilities” in the Summer issue of aiCIO Magazine: a discussion of public fund discount rates – and what rates are and are not appropriate to use when defining a plan’s liabilities, by Charles E.F. Millard, the former Director of the U.S. Pension Benefit Guaranty Corporation and now a Managing director leading Citigroup’s Pension relations team.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Study: Pensions Desert Equities in Favor of Alts, Worries Over Fees Persist

While pension funds are increasingly diversifying into alternative investments, new data from Towers Watson’s Global Pension Asset Study shows schemes remain skeptical about the fees charged by alternative investment managers.

(July 10, 2011) — Over the last decade, as pension funds have increasingly fled equities in favor of alternative investments, they have remained skeptical over fees, according to data from Towers Watson

The firm’s Global Pension Asset Study — which collected responses from 271 asset managers — showed that North America continues to account for the largest amount of pension fund assets in alternatives, followed by Europe and Asia. The share of alternative investments in global pension fund portfolios has ballooned to an average of 19% in 2010 from 7% in 2000.

Yet, pensions still remain skeptical about fees charged by alternative investment managers, Towers Watson’s head of investment research Craig Baker told the Financial Times, describing their worry over being charged for skill when what is actually being delivered is traditional market returns.

The concerns over fees explained by Towers Watson reflect similar worries cited in a February study that showed UK fund managers have increased fees, often without adding value. The report by consultant Lane Clark & Peacock (LCP) said returns were largely fueled by strong markets as opposed to superior skills, reflecting a misalignment over fees. “Because assets grew as markets went up, managers have made a lot more in fees, even if actually they did not perform very well for their clients,’ said report author Mark Nicoll, who is also a partner at Lane Clark and Peacock. “Our research demonstrates that when markets rise, investment managers generally get paid higher fees even if they haven’t added any value. In our experience, pension scheme trustees will be better served by negotiating sensibly structured performance-related fees.”

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Additionally, Towers Watson’s research showed that more of the consultant’s pension fund clients now accept the need for greater diversification, as more heavily diversified portfolios experienced lower losses during the financial crisis compared to those exposed mainly to equities. Furthermore, among the top 100 managers in the survey, the share of fund of hedge fund managers is down from 13% to 12%.

The Towers Watson study showed that global institutional pension fund assets in the 13 major markets increased by 12% during 2010 to reach a new high of $26 trillion. Global pension assets now amount to 76% of the global GDP, compared to 71% in 2009 and significantly higher than the equivalent figure of 61% in 2008.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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