Such an investment policy for underfunded public pension plans may be easier said than done, given that the Government Accounting Standards Board —the arm that regulates the accounting practices for public plans — offers sponsors incentives to pursue aggressive investment tactics, reports the Employee Benefit Research Institute.
The nonpartisan group found that underfunded public pension plan sponsors face some “perverse incentives” to uphold aggressive or risky investments polices. For instance:
- Actuarial funding methods project higher investment income for risky asset allocations than what is assumed under more conservative investment strategies. Without that income, plan sponsors with underfunded plans would have to make higher contributions to fund the projected shortfalls in their plans.
- Public plan sponsors that want to use a high discount rate (to minimize their pension liabilities) have an incentive to maintain high-return/high-risk asset allocation strategies; under current accounting practices, a high expected rate of return can be used to lower stated plan liabilities.
“While public pension plan sponsors are unlikely to significantly shift toward safer but lower-return investment policies in the short run, as the current economic recession drags on, administrators and trustees of these plans will need to seriously consider their long-term funding status and investment strategies — especially whether there is too much risk in pension portfolios,” EBRI researchers note.
Big pension plans sponsored by private-sector employers, however, experience some signs of relief as equity markets rebounded in March and bond yields continued to increase, Mercer reports. As a result, the funded status of pension plans of S&P 1,500 companies improved by $158 billion.
The aggregate funded status was 83% at the end of March, up from 74% at the end of February. The December 2008 year-end funded status was 75%, Mercer notes. The aggregate deficit of pension plans sponsored by S&P 1,500 companies was $215 billion at the end of March, down $373 billion at the end of February and down $409 billion at the end of December 2008.
“It’s important for plan sponsors to monitor asset performance to the plan liabilities. Looking at the assets only, the return for a typical plan for the first quarter may be in the region of -7% to -10%,” says Adrian Hartshorn, a member of Mercer’s financial strategy group. “However, measured relative to the plan liabilities the typical return would be around 8%. Plan fiduciaries are tasked with achieving a return that allows them to deliver benefit payment, not to beat an asset-only performance index,” he adds.
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