Moody’s Overhauling Role of Pensions in Credit Ratings

(March 19, 2013) - Moody's will have a brand new method for assessing pension health for public credit ratings come April, the agency said today. 

The new approach will only be applied to pension data reported by US state and local governments. Overall, Moody's statement indicates that the adjusted methodology will be tougher on government credit ratings than the current one. 

Still, state treasurers can relax-for the moment. Moody's said it does not expect that any state-level ratings will be immediately impacted. Among local governments, the ratings agency anticipates that roughly 2% of general obligation bonds (and similar) will be placed under review for a possible downgrade. Any credit demotion would amount to no more than two notches.

With the overhaul, Moody's is attempting to target "those local governments whose pension obligations relative to their resources place them as significant outliers in their ratings categories."

As Illinois' legislators may be interested to hear, Moody's will take into account states and municipalities' pension reforms in assessing the credit-worthiness of their bonds.

Four principal adjustments to how the agency analyzes reported pension information are under consideration:

1. Multiple-employer cost-sharing plan liabilities will be allocated to specific government employers based on proportionate shares of total plan contributions.

2. Accrued actuarial liabilities will be adjusted based on a high-grade long-term corporate bond index discount rate (5.5% for 2010 and 2011).

3. Asset smoothing will be replaced with reported market or fair value as of the actuarial reporting date. 

4. Annual pension contributions will be adjusted to reflect the foregoing changes as well as a common amortization period.

The revised approach will be finalized in April, Moody's said.