PENSIONS: THE NEXT FINANCIAL CRISIS?
Accountability-Central.com /Ryan ALM Research on Pension Fund Crisis:
Economic Meltdown/Banking-Investment Implosion Only Half The Problem As Pensions Face A $2 Trillion Deficit;
“Overvaluation” Of Assets + “Undervaluation” Of Liabilities “An Equation For Disaster”
(New York, NY, July 20, 2010) Unheard-of steps regarding public and private pension funds are beginning to unfold as serious fiscal issues facing managers and pension fund beneficiaries are now coming into focus. Most people understood that the economic slowdown -- combined with the implosion of the banking/investment community -- would have a negative impact upon their pensions, as evidenced by double digit percentage losses commonplace in pension funds investment for FY 2008-2009. This was dire enough, but in reality it is only half the problem in the ongoing pension fund crisis, still “ticking away” like a time-bomb, according to some experts.
Extensive research by Ryan ALM of New York, an asset/liability management firm, covered in an alert (“The Unspoken Truth About Pension Funds” online: https://www.sustainabilityhq.com/) posted on the Accountability Central Web site, reveals that inappropriate accounting rules have misled pension fund managers into the wrong asset allocations for their types of plans. How did this happen?
According to research by Ryan ALM of New York: “Given that that the funds hire highly-experienced and professional consultants and managers, the answer lies in the way the Funded Ratio is reported to the applicable trustees. Cities and States operate under GASB (Government Accounting Standards Board) accounting procedures while corporations are under FASB (Financial Accounting Standards Board) accounting procedures. Current FASB/GASB accounting rules do not require valuing pension assets and liabilities on a “marked to market” basis. Rather, they permit assets to be smoothed out over a defined period of time (i.e. GASB = five years). Liabilities are also not marked to market but use high discount rates (i.e. GASB = ROA).”
According to Ronald J. Ryan, CEO of Ryan ALM: “This tends to overvalue assets under the current financial climate, plus undervalues liabilities significantly. Such accounting rules distort economic reality (Funded Ratio) by not valuing assets and liabilities to accurate market valuations. As a result, many pension trustees were told that their funds were fully funded when, in fact, they had deep deficits. This is an equation for disaster as it led to inappropriate asset allocation, benefit and contribution decisions… they all link.”
Hank Boerner of Governance & Accountability Institute and Ronald J. Ryan, CEO/Founder, Ryan ALM, are available for further comment through Peter M. Hamilton at Governance & Accountability Institute (516) 248-2383 x 18 Email: phamilton@ga-institute.com.
For further information: Accountability-Central editors have established a special “Hot Topic” section on the Web site entitled Pensions: The Next Financial Crisis? (http://www.accountability-central.com/hot-topics/pensions-the-next-financial-crisis/)
“Pensions: The Next Financial Crisis?” Relevant information, including special media reports, research and commentary is available by linking to the subject at the top of the Accountability-Central home page. To further supplement the information provided to AC subscribers, Accountability-Central has partnered with RYAN ALM of New York, a firm offering a unique perspective on the pension crisis, as well as suggestions and possible solutions. The company’s most recent newsletter on Global Financial Stability, may be found at: http://www.ryanalm.com/Portals/0/newsletters/Commentary_2010_06.pdf
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About Ryan ALM
Ryan ALM was founded by Ronald J. Ryan, CFA on July 12, 2004 as an Asset/Liability Management firm. The firm builds a turnkey system of proprietary synergistic products designed to measure liabilities as a Custom Liability Index (CLI) and manage assets to the CLI as Liability Beta Portfolios and Portable Alpha Portfolios. Ryan ALM's mission is to solve liability driven problems through low cost, low risk solutions.
About Ronald J. Ryan, CFA
Ronald J. Ryan, CFA is the former Director of Research at Lehman Bros. where he designed the Lehman Aggregate, Govt. /Corporate and 60 other popular bond indexes. He also founded Ryan Labs in 1988 as a leader in bond index funds. In 2006, Ron won the William F. Sharpe Index Lifetime Achievement Award.