The way public sector DB plans invest their funds underscores the importance of diversification and the value of global investments, a recent study by T. Rowe Price found. The study, “Expanding the Fixed Income Opportunity Set for Public Pension Plans,” says that while some public DB plans pursue a diversified investment strategy, many take a more conservative approach. The study looked at the 25 largest U.S. public sector DB plans and found that they generally favor high-grade domestic assets.
This occurs against a backdrop of many plans working to bolster their funding status. The report notes that Moody’s Investors Service now seeks new pension-related calculations from government plans that more closely reflect a marked-to-market valuation of the benefits they promise their employees; T. Rowe says that for the most part these figures will show lower funding statuses.
Broader and deeper challenges created by the economic pressures facing state and local governments exacerbate funding status problems. The Governmental Accounting Standards Board is now watching public plans more closely and requiring them to make additional plan disclosures and provide more information, including net-funded status of pension plans, in the financial statements they provide. In addition, GASB standards eliminate asset-value smoothing and modify the liability discount rate, which T. Rowe says in most cases serves to increase the current value of future expected benefits. All this, the report says, hurts public plans’ funded status.
Many corporate DB plans turn to high-grade U.S. fixed-dollar assets to protect themselves against volatility in their funded status, the report notes, and they are not alone: Public plans have not been innovative with their fixed-income policies, the report found. T. Rowe suggests that portfolios that are more diversified and include global investments may give public plans a higher rate of return and improve their funded status.
To obtain a copy of the report, contact Bill Benintende at [email protected].
John Iekel is a writer/editor for ASPPA and its sister organizations, including NAPA Net.
