Not All Net Pension Liabilities Are Created Equal
Pensions & Investments on April 14 discussed the impact of the Governmental Accounting Standards Board’s new pension rules on government bond ratings. The authors argue that despite fear of widespread downgrades, the credit ratings of most plan sponsors will not be seriously impaired because the reporting changes are reflective of a reality that the rating agencies already know.
It is certainly true that the requirement to recognize unfunded net pension liabilities on the balance sheet will illustrate a better representation of the economic realities. It is also true that the rating agencies are generally aware of these unfunded obligations. The new pension reporting rules will simply put the public sector more on par with their private sector brethren.
The argument gives a lot of credence to what will become the reported value of the new net pension liabilities. Here, a little insight from the private sector and our experience may be helpful. PSSSSSTTTTT…Not all net pension liabilities are created equal.
The rating agencies private sector experts are expert in the automotive sector, or the energy sector or whatever sector they are analyzing. They are typically not insurance experts and are not typically resourced to do an insurance company analysis on the pension fund. PSSSSSTTTTT… Guess what? Sometimes these pension funds (insurance companies) are substantial in size compared with the companies they sit alongside.
Recently the Society of Actuaries came out with new mortality tables illustrating that people are living longer. This may add 6-8 percent to the liability for the typical DB pension plan. That amount will vary significantly depending on the makeup of the underlying population. The net pension liability number doesn’t capture this distinction; and typically rating agency analysts don’t have the time either.
The other large issue requiring proper analysis is the asset liability management strategy. For an insurance company like The Prudential Insurance Company of America, this is at the heart of our overall risk management. In the analysis of DB plans, it is often largely ignored.
Yes, the new GASB pension reporting rules will help to shed light on the underfunded liabilities and this is a step in the right direction. Whether or not ratings are impacted is a matter of judgment and how deeply the analysts dig beneath the covers. Detailed analysis of longevity risk, and the risk management practices surrounding asset liability management, can lead to significant differences in cash flow expectations and therefore could have impact on ratings.