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Pensions present credit risk among sub-sovereigns in multiple countries: Moody's
Moody's Investors Service says the underfunding of defined benefit pension plans for public-sector workers is a credit problem shared by sub-sovereign governments across developed countries, which includes US and Australian states, Canadian provinces, German lander and US local governments
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oody's Investors Service says the underfunding of defined benefit pension plans for public-sector workers is a credit problem shared by sub-sovereign governments across developed countries, which includes US and Australian states, Canadian provinces, German lander and US local governments.
Comparing the credit risk that pension liabilities pose among sub-sovereigns, Moody's in its latest report titled 'Moody's on Pensions: Sub-sovereign Credit Risk' finds large variations in liabilities and reform not only by country but also within each country.
Moody's says the most striking outliers in terms of size of reported underfunded obligations are found in the US.
'The German lander, however, stand sout because they do not fund long-term accruals of their obligations and do not report liabilities, creating uncertainty about the size of the risk. In contrast, the credit risks of Australian states were reduced with the conversion of pension plans to defined contribution plans,' Moody's said.
According to Moody's, the German lander makes benefit payments that typically account for 10 percent or less of current operating revenues.
'Budgetary pressure from pension costs will increase unless more funding is provided or benefits are curtailed,' Moody's said.
'In the near term, pension costs among lander are rising but appear manageable. Lander have a pay-as-you-go pension model, which means they pay for annual benefits to retirees directly from their budgets; they are able to cope with pension costs as they do with any program expenditure.'
In contrast to the lander, Canadian provinces have good transparency in their pension plan reporting, typically providing the assumptions used in calculations of liability.
'Among the provinces Quebec (Aa2 stable) and Newfoundland and Labrador (Aa2 stable) face the largest pension risk owing to the size of their unfunded pension liabilities relative to their revenues,' Moody's said.
