US public pensions accounting ‘understates liabilities’

US ACCOUNTING STANDARDS experts have warned current rules could allow public pension schemes to understate their liabilities, potentially leaving huge gaps in state funding.

The Government Accounting Standards Board has proposed an end to pension funds treating as temporary the (typically) regular increases in payments to their beneficiaries, the Financial Times reports.

International Financial Reporting Standard 19, post-employment benefits, was recently unveiled, and it too aimed to prevent pension plans understating their liabilities.

Unlike IFRS 19, the US proposal would allow public pension plans to retain discretion over how they estimate their funding status. One of the primary changes in the global standard was to force investors to value their assets at the level of AA-rate corporate bonds, doing away with the previous system in which directors effectively set the value of the fund according to expected return on investment.

However, some experts are critical of the proposal: Josh Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University, warned: “It doesn’t really address the problem. It’s a compromise driven more by political considerations than economics.”

States such as Illinois and New Jersey are facing big budget holes due to pension funding shortfalls. Matt Fabian, managing director of Municipal Market Advisors, said: “It is going to make the underfunded states look worse and potentially dramatically worse.”

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Fiona Westwood of Smith and Williamson.