More transparent pensions

John has a pension plan. He once called the managing company about the plan. What they told him is that he can start planning his pension before his retirement age 65 or wait until then. John wasn't sure how the 65 retirement amount is calculated. The company rep simply told him that his employer put money in some "secured" investment so that the future value can grow at about 5% to the time his retirement. Surprised, John asked, "how do they guarantee that?". Surprised by the answer from the rep again, "we don't know, but there is a federal fund can guarantee some, probably all of your pension." That made John think immediate withdraw may be a better way. This is a true case.

Now the situations start to change.

Many pension plans invest in municipal bonds, which can be minefields. It is very difficult to spot camouflaged explosives. It is true that pensions are federal protected but since the government doesn't visibility on pensions, it is hard to predict disasters if there is any coming. Now the Governmental Accounting Standards Board (GASB) is determined to improve pension's disclosures. They proposed the disclosures of pension liabilities on the face of the entity's financial statements. In some cases, the government also calculates the present value of pension liabilities more conservatively, based on high-quality municipal bonds, rather than a plan's own expected return. Quite often, a plan is overly optimistic about their returns. Pension is also directly related to employee's employment duration so that they get paid based on the duration. But on the pension plan management side, they don't use the actual duration to calculate pension costs. What is used is 30-year duration. This ought to be changed to base on employee's duration.

It provides more visibility to government and consequently, employees. But pension liabilities will be up. A higher levy on liability is better than illuminated return. Safe better than sorry.