NCPERS Backs Current Discount Rate System

July 22, 2009 ( - A trade group of public pension plans has come out in favor of making no changes in the current standard of selecting the discount rate used in determining the long-term investment return of public pension systems.

In a letter to the Governmental Accounting Standards Board (GASB) about GASB’s Invitation to Comment (ITC) on Pension Accounting and Financial Reporting, the National Conference on Public Employee Retirement Systems (NCPERS) asserted the discount rate should continue to be based on the expected long-term return rate on public pension investments (see GASB Wants to Know What You Think ). The NCPERS letter was posted on its Web site.

“A valuation approach that ignores fundamental characteristics of the retirement benefit will not reflect the underlying dynamics of the plan and will not provide an accurate or useful measure of the plan’s liabilities and related contributions,” NCPERS officials wrote. “Moreover, because the (market value liability) MVL does not include projected future salary and service in the contribution rate, plan contributions under the MVL will likely increase as salary and service increase.”

NCPERS noted that proponents of the MVL approach argue that the current setup for funding public pension plans results in government contributions that are lower than necessary to fund the plan and that as a result, future taxpayers will likely pay higher contributions to make up the difference.

“If the MVL approach were used to disclose public plan liabilities but not to establish contribution rates, it is likely that legislators, taxpayers and members of the press would have difficulty distinguishing the different purposes behind reporting a ‘market liability’ and a ‘funding liability,’ ” NCPERS wrote. “Instead of making financial reporting more transparent, the MVL approach would likely lead to confusion about the costs and sustainability of the plans. This could result in poor policy decisions and potentially lead to the needless abandonment of public pension plans.”

The NCPERS letter is available here . More information about the GASB ITC is here .