The Government Accountability Office (GAO) in a recent report has highlighted one of the ways public- and private-sector deferred benefit plans differ — valuation. “Pension Plan Valuation: Views on Using Multiple Measures to Offer a More Complete Financial Picture” outlines and discusses these differences and their implications.
Rate of return is one such difference. Single-employer private DB plan sponsors use bond-based discount rates to report their plan liabilities, the GAO found. Public-sector plans, on the other hand, generally use discount rates with a long-term assumed average rate of return on plan assets.
Funding is another area of divergence, and not just between public and private plans. Private-sector single-employer DB plans tie their funding requirements to historical interest rates, says the GAO, which can reduce funding compared to measures based on more recent interest rates. Their multi-employer counterparts, however, generally use an assumed rate of return for funding purposes.
And what of public plans’ funding? The GAO says that their approach to use of discount rates results in reported obligations that generally appear lower than those of comparable private-sector single-employer DB plans.
Experts identified the following purposes for measuring the value of future benefits when discount rates are used:
• determining sponsor contributions;
• reporting plan liabilities to stakeholders;
• determining the amount needed to secure benefits;
• measuring the value of employee benefits; and
• determining the lump sum settlement amounts.
The experts also identified a variety of considerations in setting discount rate policy including:
• comparability;
• cost;
• fairness;
• risk;
• sustainability; and
• transparency.
To address trade-offs among those varied and sometimes competing purposes and considerations, many experts thought it worthwhile to report multiple measures of plan obligations, using different discount rates. Some also regarded assumed returns public plans use to be too high under current market conditions.
Rate of return is one such difference. Single-employer private DB plan sponsors use bond-based discount rates to report their plan liabilities, the GAO found. Public-sector plans, on the other hand, generally use discount rates with a long-term assumed average rate of return on plan assets.
Funding is another area of divergence, and not just between public and private plans. Private-sector single-employer DB plans tie their funding requirements to historical interest rates, says the GAO, which can reduce funding compared to measures based on more recent interest rates. Their multi-employer counterparts, however, generally use an assumed rate of return for funding purposes.
And what of public plans’ funding? The GAO says that their approach to use of discount rates results in reported obligations that generally appear lower than those of comparable private-sector single-employer DB plans.
Experts identified the following purposes for measuring the value of future benefits when discount rates are used:
• determining sponsor contributions;
• reporting plan liabilities to stakeholders;
• determining the amount needed to secure benefits;
• measuring the value of employee benefits; and
• determining the lump sum settlement amounts.
The experts also identified a variety of considerations in setting discount rate policy including:
• comparability;
• cost;
• fairness;
• risk;
• sustainability; and
• transparency.
To address trade-offs among those varied and sometimes competing purposes and considerations, many experts thought it worthwhile to report multiple measures of plan obligations, using different discount rates. Some also regarded assumed returns public plans use to be too high under current market conditions.
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