Last updated: April 10, 2014 10:31 pm

US public-sector pension schemes resist being reformed

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The financial condition of many US state and municipal pension plans has emerged in stark and unflattering contrast to that of private companies, according to a report from Moody’s Investors Service.

The private sector has made great strides in cutting the risks that their plans pose to profits thanks to recent rules that require them to disclose accurately the size of retirement promises. In contrast, the public sector has fought off these accounting standards and funding rules, allowing them to push into the future the cost of shortfalls.

“The divergence between public and private pensions accelerated in the current century and has now reached a marked extreme in terms of risk profiles and size of exposure relative to other debt,” Moody’s said.

While corporates have closed their defined-benefit schemes to future accrual and shifted investment risks to workers, public sector unions have not done so. As a result, many corporate schemes already hold as much as 95 per cent of the capital they need to meet all pension promises in full and on time. Strong gains in equities markets have allowed them to shift investments into bonds which will pay out enough cash to pay all promised benefits.

Moody’s said that two, wildly divergent, outlooks have by now emerged, for corporate and for public-sector pensions. With the former, the rules that began to take effect in 2002 made it clear to shareholders the nature of each company’s pension obligations.

But the public sector has few incentives to change. “On the public sector side, pension accounting and disclosure are changing only slowly, and the incentives to DB pension de-risking do not yet exist,” Moody’s said. “State and local governments dealing with the problem of pension funding are effectively swimming against a tide.”

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