pension fund’s operations and funding status in the
event of an adverse investment environment.
Standard & Poor’s will consider the fund to be of
weaker quality when there is consistently below
average funded ratios or where the pension system
is closer to pay-as-you-go status (no accumulated
assets, with benefits funded as an annual expense).
Standard & Poor’s analyzes the pension fund’s
current and historical investment returns compared
with benchmark return targets that have been
imputed into actuarial assumptions. Accordingly, a
thorough evaluation of the assumed discount rate,
including the discount rate’s level of conservative-
ness and actual rate of return, will be conducted.
Investment losses can result in the substantial weak-
ening of the fund’s asset portfolio, potentiallyresulting in decreased liquidity, reduced flexibility
in terms of covering pension payments, and
increased dependence on the government sponsor
for higher contributions. In analyzing investment
income and performance, focus will be placed on
how much investment income derives from actual
cash payments (such as interest, dividends, and
rental income) as opposed to investment income
generated from capital appreciation.
Standard & Poor’s evaluates various performance
metrics in order to assess operating efficiency and
asset maximization. Standard & Poor’s employs
performance ratios such as return on assets, return
on net assets, and total margin. These metrics are
useful in providing insight as to how effectively the
pension fund is able to augment its operating
income and leverage its asset base. Standard &
Poor’s also uses a service delivery efficiency ratio
that looks at what percentage of total annual pen-
sion fund expenses are specifically for retirement
benefits. Consistently maintaining a very high serv-
ice delivery ratio (one that approaches 100%) over
time is a credit strength. Conversely, in cases where
administrative or other expenses consistently com-
prise a larger share of operating expenses, or where
there is tremendous fluctuation in service delivery
requirements, suggest credit weakness.
Standard & Poor’s conducts a historical analysis
of the makeup of the fund’s balance sheet and
income statement. Specifically, Standard & Poor’s
will seek to understand and annually compare the
composition and movement of the fund’s assets and
liabilities in relation to their respective total bases.
Finally, Standard & Poor’s assesses the pension
fund in relation to the government sponsor in order
to determine how material the pension fund’s opera-
tions and liabilities are to the sponsor. Standard &
Poor’s will look at the sponsor’s annual pension
contribution relative to its own budget, which will
reveal the level of financial resources needed to reg-
ularly support the pension fund, and is analogous to
a debt service carrying charge calculation regularly
conducted for general debt credit analysis. A calcu-
lation of the UAAL relative to the sponsor’s operat-
ing budget will be an important indicator as to the
significance and rate of change of the unfunded lia-
bility. Similarly, the unfunded pension liability will
be analyzed in terms of UAAL per capita (using the
government sponsor’s population) and UAAL as a
share of per capita income (using the per capita
income of the government sponsor’s population).
Although pension fund liabilities are not generally
considered to be “hard” debt, they are considered to
be debt-like in nature, and it is useful to make pen-
sion fund burden comparisons that are similar in
nature to general credit debt burden ratios.■334 Standard & Poor’s Public Finance Criteria 2007Other Criteria■The statute or constitutional provisions that establish the organization and
operation of the pension fund.
■Five years of audited financial reports for the pension fund sponsor(s).
■Five years of audited financial reports for the pension fund.
■Current pension fund actuarial report with detailed actuarial assumptions.
■Statutory or constitutional requirements for annual sponsor funding
contributions, and, the terms for employee vesting of plan benefits and
employee contributions and refunds.
■The pension fund’s operating and funding principles, objectives, and strategies.
■Description of current pension fund board and management.
■Statutory and/or formal regulations or guidelines that control allowable
investments, asset allocation, and risk management.
■Ten-year history of pension fund accumulated assets, as well as pension fund
UAAL, funded ratios, sponsor contributions, employee contributions, and
investment performance.
■Five-year trend of investment allocation.
■Description of pension plan benefits and changes (if any) over the past five
years, plus statutes governing benefit changes.
■Authorizing legislation permitting the extension of guarantees by the pension
fund, including any limit on the types or amounts of permissible guarantees.
■Specific terms and documentation of the credit enhancement program
(or related guarantee) and capital call requirements, if any.
■Description of the priority of debt guarantees vis-à-vis pension benefit obligations.
■Legal opinions on validity and enforceability of pension fund guarantees.
■List of current obligations guaranteed by pension fund and a description of
proposed and/or future debt obligations that may be considered for
future guarantees.
■Current and historical, legally available liquid asset balances that are
dedicated to the existing or proposed credit enhancement program,
as well as monitoring procedures.
■Detailed credit enhancement program asset liquidation plan.
■Monthly cash flow statements.
Pension Fund Rating Documentation