US - Public pension plans are being allowed to 'mask' their true funding status and should be forced to adopt the same accounting standards as corporate plans, asset managers have said.
Ehrentreich said: "Public plans say they are different than corporate plans, but we disagree. Accounting rules are meant to reflect reality whereas accounting standards for public plans help them mask their funding status.
They adopt investment policies that will lead to higher costs and this is not to their benefit.
"They should adopt LDI, including the Pension Benefit Guaranty Corp."
Corporate and public pension plans come under different accounting and regulatory regimes, regulated by the Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB) respectively, and as a result their funding and accounting requirements are different. Public funds don't mark to market for liabilities, for example.
Ryan McGlothlin, managing director of asset management firm P-Solve, commented: "There have been a few public funds moving to LDI, but it's a minority thing because of the accounting and regulatory environment. The few that have adopted an LDI-led investment philosophy haven't implemented 'full' LDI with swaps and so on.
"US public funds would look in bad shape under mark to market."
The asset managers estimated that if public funds were brought into line with corporate plans their funding levels could drop to 50% or lower.
However, Keith Brianard, research director of the National Association of State Retirement Associations dismissed such claims, saying corporate sector accounting rules bore "little resemblance" to the special needs of public plans.
"Corporate accounting rules are based on the termination of private plans - requirements we do not have. We believe the corporate finance model has little application to public plans. Some public funds are applying LDI to some degree or another, they're just not required to do so," Brainard said.
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