disputes over the degree of underfunding of the Detroit pension plans<\/a>\u00a0\u2014 Orr, the Emergency Manager, wants to use an assumed return of 7%, and the unions want to use 8%, which would, apparently, better position themselves for a favorable outcome to the negotiations and decisions around the backruptcy.<\/p>\nBut the plan is 50% funded, optimistically.\u00a0 The reports linked to by McArdle are proper actuarial valuations for government plans, using funding rules far different than in the corporate world.\u00a0 The biggest difference is that public pension plans use an expected return on assets as the interest rate in their liability valuation, for both accounting and funding purposes, whereas in the private sector it\u2019s a corporate and adjusted government bond rate, respectively.\u00a0 <\/p>\n
The \u201cexpected return on assets\u201d approach is an outdated approach in the private sector, with one exception:\u00a0 church plans, which are not subject to government funding regulations, may choose to use this as a measure of whether they\u2019re meeting their internal funding targets \u2014 or, at least, when I worked on US pension plan valuations, my \u201cchurch plan\u201d clients used this approach to make good faith efforts to fund their plan.<\/p>\n
But does it really make sense to measure pension obligations on an asset-return\u00a0basis if you\u2019re measuring the liability to put it side-by-side with other liabilities?\u00a0 Certainly the city could never settle the liabilities (that is buy annuities to eliminate liability) on this basis.\u00a0 To the extent that each pensioner is a creditor of the city, a buy-out liability is a more apples-to-apples comparison of what\u2019s due them vs. other creditors.\u00a0 <\/p>\n
It also leads to\u00a0unsuitable asset\u00a0allocations if the only goal is to justify a high asset return rate, rather than to actually balance return and risk.\u00a0 (And, based on the duration, Detroit appears to have a large proportion of retirees, which should require more conservative, rather than more aggressive, returns.)<\/p>\n
But it\u2019s just, all around, a bad situation!<\/p>\n<\/body><\/html>\n","protected":false},"excerpt":{"rendered":"
I hope to have time to flesh this out more later, but Megan McArdle has a post on disputes over the degree of underfunding of the Detroit pension plans\u00a0\u2014 Orr, the Emergency Manager, wants to use an assumed return of 7%, and the unions want to use 8%, which would, apparently, better position themselves for […]<\/p>\n","protected":false},"author":2209,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-894","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"yoast_head":"\n
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