Foreign Comparison Exposes the Risks Involved in US Pension Management

According to a recent article in the New York Times, a foreign comparison brings to light the risk involved in US pension management. Dutch pension plans are well-funded by comparison to US pension plans, and they are required to report their liabilities using a method from the financial-services industry, according to the Times.

Notably, the Dutch central bank prohibited the measurement method that virtually all American states and cities use, which is based on the hope that strong market gains on pension investments will make the benefits cheaper. A significant downside to this method is that it lets pension systems take advantage of market gains today, but pushes the risk of losses into the future, for others to cope with. “We had lengthy discussions about this in the Netherlands,” said Theo Kocken, an economist who teaches at the Free University in Amsterdam and is the founder of Cardano, a risk analysis firm. “But all economists now agree. The expected-return approach is a huge economic offense, hurting younger generations.”

He explained that in the Netherlands, regulators believe that basing the cost of benefits today on possible investment gains tomorrow is the same as robbing tomorrow’s workers to pay for today’s excesses.

In Maryland, the State Retirement and Pension System Board of Trustees recently lowered the expected return of the pension system investments by 0.05% each year for four years, starting in 2013, towards an assumed rate of return of 7.55%.  Also in recent years, the Governmental Accounting Standards Board introduced new standards for pensions reporting.

For more information, see the full story from the New York Times and these previous posts on Conduit Street, The Financial Health of the Maryland State Pension SystemMaryland State Pension System: Investment Strategy and Management, and The State Pensions System’s Comprehensive Annual Financial Reports and New GASB Standard Approaching for Pension Funds.