Moody's Says Pension Holes May Hurt US State Ratings

Moody’s Investors Service has said in a report that pension obligations will continue to weigh on states’ credit ratings.

(January 28, 2011) — Moody’s Investors Service has provided a combined look at debts and pensions for the first time to analyze states, showing that some US states face such intense pressure to fund pensions that it could hurt their credit ratings.

The report is a result of escalating concerns over the ability of many states to fund their pensions following the recession. “Large and growing debt and pension burdens have been, and will continue to be, contributing factors in rating changes,” Moody’s said.

The joint figures, which rank states’ creditworthiness after “rapid” growth of their unfunded retirement obligations, make it easier to compare fixed costs among states and with corporate-bond issuers, according to Moody’s. Previously, the company had included pension liabilities separately in evaluating states.

Connecticut, Hawaii, Illinois, Kentucky, Massachusetts, Mississippi, New Jersey and Rhode Island, along with Puerto Rico, have the largest debt-and-pension loads, Moody’s found, while Nebraska and South Dakota have the lowest.

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According to the ratings agency, state pensions, which are underfunded by at least $700 billion, face issues that include low returns on investments, an inadequate amount money being saved, the impending retirement of “baby boomers” born in the late 1940s through the 1960s, and Americans living longer than expected. “Unfunded pension liabilities have grown more rapidly in recent years because of weaker-than-expected investment results, previous benefit enhancements and, in some states, failure to pay the full annual required contribution,” the report said, adding that states may understate their pension liabilities and that pressure to fund retirements will continue to have a “negative impact” on ratings. “Moreover, pension liabilities may be understated because of current governmental accounting standards.”

In September, Moody’s revised its outlook from stable to negative for both Illinois and New Jersey, largely due to their pension liabilities.



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

IMF Says Sovereign Wealth Funds Must Review Investment Objectives

A report issued by the International Monetary Fund (IMF) has argued that sovereign wealth funds should engage in regular macro-risk assessments, stressing the continued importance of these large pools of capital as stabilizers in international markets and major players in global regulatory reform.

(January 28, 2011) — The International Monetary Fund has asserted that during the financial crisis, some sovereign wealth funds changed their asset allocations in ways that may not have been ideal or justified, urging a review of investment objectives.

In a report posted on the firm’s website, the organization noted that sovereign wealth funds have a strong capacity to stabilize international capital markets due to their enormous size and long-term investing approach. The report asserted that in response to the global crisis, funds reacted by increasing liquidity, taking on additional risk, or adding new roles to their traditional mandates.

The document, by Peter Kunzel, Yinqiu Lu, Iva Petrova and Jukka Pihlman of the IMF’s monetary and capital markets department, urged sovereign wealth funds to reexamine their communications, reserve adequacy, and liquidity policies. According to the IMF, sovereign wealth fund losses during the financial crisis have sparked domestic debates on SWFs’ investment strategies. “Some have been criticized for entering the equity market at the wrong time, some blamed for a lack of insight for investing in financial institutions at the early stage of the crisis and suffering heavy losses, and others reproached for investing abroad when their support for domestic markets was highly needed,” the report stated. “These criticisms have put SWFs’ investment outlooks and strategies under increased scrutiny and their managers under pressure to avoid further losses.”

The IMF’s research also explained that the crisis impacted sovereign wealth funds’ asset allocations in varied ways. While the Alaska Permanent Fund and Ireland’s National Pension Reserve Fund increased their share of cash holdings, Norway and the Australian Government Future Fund increased their equity investments. Some funds, such as Singapore’s Temasek Holdings, shifted their investments geographically.

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To see the full report by the IMF, click here. 



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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