The Case for New Pension Accounting Standards
A Critical Look at How We Measure Pension Health
Are America's public pensions in crisis—or are the rules we use to measure them creating an illusion of crisis? This 2019 report challenges fundamental assumptions about how we account for public employee retirement systems.
Author Tom Sgouros of Brown University argues that current pension accounting rules don't just measure reality—they distort it, encouraging poor decisions and creating unnecessary panic. The very framework designed to ensure pension health may actually be undermining it.
The Hidden Problem
The research reveals critical flaws in how pension systems are evaluated:
Treating pension debt like regular debt creates false alarms. Unlike typical debt, pension liabilities don't appear as anyone's asset. They're not owed to specific creditors and don't follow the same rules—yet we treat them identically on balance sheets. - The numbers are far less precise than they appear. Pension liability calculations combine high-accuracy asset values with low-accuracy predictions about the distant future. The result? Numbers that seem authoritative but could easily be off by 30% or more.
- Good investment performance doesn't guarantee success. A pension fund hitting all its investment targets can still lose money if withdrawals come at the wrong time—a risk completely hidden by present value calculations.
- Closing a plan increases risk rather than reducing it. When plans close, they lose steady premium income and become entirely dependent on volatile investment returns—the opposite of sound financial management.
The Economic Impact
The consequences extend beyond individual pension funds. Between 1980 and 2010, state and local pension assets grew from nearly nothing to over $4 trillion. During years when this represented a significant portion of GDP growth, the nation's economic expansion was being funneled into financial assets rather than productive investments.
"When things go awry for pensions, it is often not because the accounting rules are ignored, but because they are followed"
A Path Forward: New Pension Accounting Standards
Rather than simply criticizing current standards, the report proposes concrete alternatives. These changes would provide clearer guidance to pension managers while reducing political pressure to make risky decisions based on misleading numbers.
- Blended costing that acknowledges the inherent uncertainty in pension calculations
- Risk-weighted assets that account for portfolio composition
- Depletion date planning instead of funding ratios
- Valuing the sponsor's economic strength as a pension system asset
The Bottom Line
Are all pension fund managers irresponsible, or is there a deeper problem with how we measure pension health? This report makes a compelling case that accounting rules themselves contribute to the pension funding challenges facing many states and cities nationwide.
The good news: a semantic problem can have a semantic solution. By rethinking how we measure and report pension obligations, we can preserve this valuable institution without massive restructuring.
Read the full report to discover why pension accounting matters—and how better rules could change the conversation around public employee retirement security.
Published May 2019 by NCPERS