I mean, they can compute the number however they want, but that doesn’t make 6.8% a reasonable discount rate. It just means that your reported funding levels follow a spurious pro-cyclical pattern.
Yeah but that’s the point, their plan for delivering those pensions is to get 6.8% per year. A scenario where the fund returns 0% per year is a disaster for them, there’s no “bail out” on the liability side if the 0% return scenario comes with an increase in market interest rates. The funding target for the plan will barely move but they’ll be way behind on the actual assets in the plan. That will require increased contributions, pension cuts, explicit government bail outs, or a combination of all three.
It’s a different story on corporate pensions which are generally closed and where liabilities are marked to market with corporate bond yields. In a financial crisis the assets and the liabilities tend to both go down. For a public sector plan, no one is marking the liabilities to any bond market so in a financial crisis they just fall behind their funding plan and need to increase the money going in or decrease the money going out.
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Isn’t this just the weird difference between pension accounting for governmental entities vs. for-profit entities? For for-profit entities, the discount rate and assumed rate of return are separately determined, but for governmental entities (I think), they are required to be the same.
So the fact that the discount rate hasn’t changed just indicates that they’re basically determining the assumed returns to be fairly constant over time (which imposes a flat discount rate).
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I’ll just say that this guy is not what I imagine when I think of a chief actuary.
Has a real “I teach high school physics, but play in a band on weekends” vibe.
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Every public sector actuary I’ve ever met looks like that.
Yeah, what I was trying to say is that both the low-rate equity boom and the increase-rate equity crash are, at least in part, illusory. The real funding level of the plan should wash out (at least partially) asset price movements driven by changes in discount rates.
Sort of. The know returns will be volatile. What they are saying is that at any point in time the expected future returns are not that different than they were the year before, which is a massive bias to stability and results in a lack of responsiveness in assumption setting.
Sure. I mean, if their weighted cash flow horizon is like 10 or 20 years, it’s hard to believe that average compounded returns for that period are going to move radically from one year to the next.
But asset prices and discount rates are barely correlated for public sector plans. It takes 40 years of declining market interest rates to provoke a change in the discount rate. Their funding target (measured by the actuary using a discount rate based entirely on speculation about future pension fund returns) is not responsive to short term gains or losses in the pension fund.
i mean noone really ranks 2000 stock crash as even in the same category to 2001 or 2008, or even the s&l crisis. employment suffered but early 2000s created a lot more programming jobs than were lost in the dot com bust. the tech tide happened anyway so to speak.
i know it’s in the cultural psyche now to make fun of pets.com. but i now buy cat food on chewy, so the nerds won anyway and got rich regardless of the dot com bust.
fwiw airbnb makes money
It depends on the asset mix. If you hold a lot of bonds, then your future expected return looks an awful lot like the yields on those bonds.
There is also an implicit statement in never changing your outlook for equities while bond yields are going down down down, when that is done you’re implicitly assuming ever increasing risk premiums for holding equities. That’s a “debatable” idea.
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I’m talking about from a stonk investment standpoint, obviously there will be a need for tech workers regardless of stonks or not stonks.
But their actual investment returns are based on market prices, which presumably price in a real discount rate on future cash flows. Like, what’s happened in the last few years is that discount rates have gone way down, which looks like great investment performance, but doesn’t make it any easier to pay liabilities that are 40 years out.
Imagine a zero-coupon bond that pays $1000 in 2050. Owning that bond allows you to pay exactly $1000 of pension in 2050, but its market price fluctuates wildly. In particular, you would have a big capital gain on that bond over the last 5 years, but that capital gain contributes nothing to your actually ability to pay your benefits.
Right, but this is not how public sector pensions are invested. Their assets are simply not this well matched (or even closely matched) to their liabilities. They are depending on their assets to grow fast enough to meet the pensions that are going to come due. Any scenario where they earn less than 6.8% is bad for them. You math only works if you have a hedging portfolio that delivers cash flows to pay benefits. These immunized portfolios exists for closed private sector plans, but they do not for public sector plans.
this is an interesting discussion although i would probably venture that while there might be leveraged investment funds holding stock, i doubt the percent of those is higher than those holding mortgage junk in 2008. like in 2008 the risk of a bond was mis-rated, obviously a lot of money bought them thinking it was safe. but noone considers stocks as safe, why would they leverage themselves to buy more? are you saying a bunch of funds bought a lot of total market etfs?
how do you think devaluing a currency occurs?
Pro tip to all the guys out there who can’t seem to figure this out on their own: The only way to maintain dignity while losing your hair is to shave your head. There are no exceptions.
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I have a hard time believing there are so many leveraged equity positions so as to trigger a massive selloff.
oh i see. i’m conflating conversations about stonks prices with recession discussion.