EBRI: Public Pensions Should Consider Future Taxpayer Burden

April 9, 2009 (PLANSPONSOR.com) - A new analysis by the nonpartisan Employee Benefit Research Institute (EBRI) shows that, under current accounting rules, underfunded public pension plan sponsors face some "perverse" incentives to maintain aggressive or risky investments, so they are unlikely to significantly shift toward safer but lower-return investment policies, despite the current recession.

The analysis, available in the April 2009 EBRI Notes, notes that the eroded funding status of public pension plans is a source of growing concern about the size of deficits in these plans and the risk that taxpayers will have to make up the shortfall.  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 their pension portfolios, EBRI says.

The organization points out that under current rules adopted by the Government Accounting Standards Board (GASB), public plan sponsors face at least two incentives to maintain aggressive investment policies:

  • 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.

Moving to lower-return but less volatile investments would increase the stated unfunded pension liability in public pension plans and therefore require additional employer contributions. However, the EBRI analysis says this may be necessary both to address the current economic reality facing public plans and to avoid the need for even greater taxpayer-financed contributions in the future.

The April 2009 EBRI Notes can be found at www.ebri.org .