Funding ratios will become more volatile in the years ahead following the introduction of new accounting standards, according to Fitch Ratings.
The new measurements, introduced by the Governmental Accounting Standards Board (GASB), will mean US pension funds are “fully subject to market cyclicality”, the ratings agency said.
“In an accident of timing, the transition to GASB 67 is taking place at a very favorable moment.” Douglas Offerman, FitchThe measures—known as GASB 67—have led to pensions reporting “materially higher asset values”, Fitch said, which reflected strong gains from equities and bonds in recent years.
However, Douglas Offerman, senior director at Fitch, said the positive data was “an accident of timing”, and his company warned that the good news was unlikely to last.
“In an accident of timing, the transition to GASB 67 is taking place at a very favorable moment in the economic cycle for reporting asset valuations,” Offerman said. “In most cases, the market value of assets reported by systems under GASB 67 is much higher than the smoothed asset value reported previously.”
Fitch said GASB 67’s calculations meant valuations would fully reflect market values, resulting in higher volatility of funding ratios in future.
GASB 67 also introduces a “depletion date”—an estimated date at which point a pension’s assets would run out based on current valuations and actuarial calculations. Fitch said in some areas this had highlighted “weak practices—notably an unwillingness to consistently fund an actuarially calculated contribution.”
Fitch said underfunded contributions would lead to both a closer depletion date and a declining asset base.