By Yali N’Diaye

WASHINGTON (MNI) – Moody’s Monday described as credit positive the
intention of two U.S. public pension funds to lower their assumptions
when it comes to returns on their investments, noting it lowers the risk
that future returns disappoint and brings governments’ finances on a
more sustainable path.

The rating agency stressed in an article that “market volatility
and economic uncertainty increase the risk that pension returns will not
meet actuarial investment return thresholds in fiscal 2012.”

Earlier this month, the City of New York Retirement Systems
announced its intention to lower its investment return assumptions to
7.0% from 8.0%.

The California State Teachers’ Retirement System (CalSTRS) is
lowering its investment return assumptions by a more modest 25 basis
points to 7.50%.

The assumed rate of return is key in determining the funding level
of public pension plans. The lower the assumed return, the higher the
discounted value of liabilities, and the worse the funding status. That
means more pressure on governments’ finances, at least in the short
term.

In the case of CalSTRS for instance, the fund’s actuary estimates
the 25 basis point decline in the assumed rate of return adds nearly $6
billion to the $56 billion unfunded liability.

The City of New York estimates it will cost an additional $1
billion annually, which is set aside in next year’s budget.

However, on net, the move is credit positive, Moody’s said in its
Weekly Credit Outlook, stressing the long-term positive impact of
prudent assumptions.

“Although using a lower one will require already stressed state and
local governments to make larger payments, and creates additional budget
pressure, it puts governments on a more sustainable path to ultimately
fully funding their pension commitments and is credit positive,” Moody’s
analysts wrote.

In addition to bringing governments’ finances on a more sustainable
pace, “a lower investment return assumption also lessens the risk that
future investment performance will fall short of assumed returns,”
Moody’s said.

It pointed out that higher expected returns drive pension plans to
invest in risker assets, increasing the volatility of the returns.

For New York City, for instance, “While pension costs in the budget
will increase, the plan over the long run will lead to greater
stability, since using the 7% rate will mitigate market volatility in
actuarial calculations of the city’s pension liabilities.”

** Market News International Washington Bureau: 202-371-2121 **

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