March into spring with Extra Credit as host, Tiffany Tribbitt, presents a new edition of Retirement Roundup with S&P Global Lead Analysts Timothy Little, Todd Kanaster, and Joshua Travis to explain S&P’s pension guidance, relevant metrics, and set the stage for the new commentary series “Pension Spotlights” starting with Texas.
Editor’s note: This episode was recorded on February 20, 2020. All discussion of market events and credit conditions reflects information available as of that date.
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- Timothy Little, Director and Lead Analyst in the States group, explains how S&P’s pension guidance brings additional transparency to U.S. Public Finance reports and walks through a few pension and other post-employment benefit (OPEB) trends. The pension guidance provides a means to detail risk associated with pension metrics. The low interest rate environment could mean plans may have to reach for yield to attain target returns, which could increase contribution volatility, and moreover a market correction may act as a potential catalyst for pension reform. Read S&P’s pension guidance in full and learn more about pension and OPEB trends S&P is monitoring in 2020.
- Todd Kanaster, Director of Municipal Pensions, goes into the reasoning behind and application of S&P’s discount rate guideline and how it is used to assess volatility risk. This, of course, will be reassessed periodically based on market conditions. He also details how S&P calculates its static funding and minimum funding progress metrics and discusses how they’re used, along with amortization methods, in our forward-looking analysis. Our amortization guidelines provide a framework to assess the funding of unfunded liabilities. Positively viewed methods minimize contribution deferrals through rapidly increasing payments or long timelines that could pass costs on to the next generation.
- Joshua Travis, Director and Lead Analyst in the Local Governments South group, closes the episode with a deep dive into his Texas pension spotlight. Generally, plans with fixed rate contributions are habitually below actuarial recommendations and thus tend to have low funding progress when compared to plans with actuarially set contributions. The divergence in funding progress is demonstrated when examining the actuarially set Texas Municipal Retirement System (TMRS) and Texas County and District Retirement System (TCDRS) plans compared to the statutorily set Teacher Retirement System of Texas (TRS) and Employees Retirement System of Texas (ERS). Joshua notes there isn’t a single factor that would lead to a rating action, instead, considerations are made around the level of funding discipline, plan oversight, and plan assumptions, as well as individual issuers’ abilities to respond to these challenges.