 What Ails Public Pensions?Richard M. Ennis Financial Analysts Journal, 2007, vol. 63, issue 6, 38-43 Abstract: Actuarial convention has the effect of driving equity allocations of public pension plans upward. It also pushes the risk of pension funding onto future generations of taxpayers, which has fostered taxpayer discontent. Yet, pension plans in the public sector have much to offer in terms of design features, benefit security, cost effectiveness, and investment performance. Ideally, they will evolve into quasi-autonomous financial institutions. For this to happen, they will have to (1) mark assets and liabilities to market, (2) implement funding and benefit-improvement disciplines, and (3) cease to pursue social, political, and economic development ends.Statewide pension plans report that, based on actuarial convention, they are 87 percent funded. If assets and liabilities are marked to market, however, the funded ratio drops to between 62 percent (on the basis of the projected benefit obligation) and 75 percent (on the basis of the accumulated benefit obligation). Actuarial convention has the effect of pushing the risk of pension funding onto future generations of taxpayers and has driven equity allocations in investment portfolios upward. It also obscures significant wealth transfers that occur routinely among plan participants and various generations of taxpayers. The upshot is that future taxpayers face significant moral hazard in connection with the operation of public pension plans. Taxpayer discontent is behind efforts to replace defined-benefit plans with defined-contribution plans in the public sector.Yet, DB pension plans in the public sector have much to offer in terms of design features, benefit security, cost-effectiveness, and investment performance. Ideally, they will evolve into quasi-autonomous financial institutions. For this to happen, they will have to (1) mark assets and liabilities to market, (2) implement funding and benefit-improvement disciplines, and (3) cease to use plan investments to pursue social, political, or economic-development initiatives.This type of evolution could have interesting ramifications for investment policy. Bond durations would almost certainly lengthen. Genuine risk tolerances could emerge and become operative. As a result, equity allocations, which currently cluster in the range of 72–77 percent, might well become more varied as they reflect genuine differences in risk tolerances. Date: 2007 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:ufajxx:v:63:y:2007:i:6:p:38-43 Ordering information: This journal article can be ordered from Access Statistics for this article Financial Analysts Journal is currently edited by Maryann Dupes More articles in Financial Analysts Journal from Taylor & Francis Journals |
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