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Pension accounting changes could alter bond investor demand

New pension plan accounting standards could change market demands for municipa

The accounting standards governing pension plans in some states are set to change, and the new rules could have some surprising effects on the municipal bond market, according to a recent Bloomberg News analysis.

The Government Accounting Standards Board will issue new guidelines in June changing the way liabilities are calculated and assets are reported on financial statements. The rules will primarily apply to Illinois, Indiana, Kentucky and New Jersey, where pensions may have less than 30 percent of the assets required to cover promised benefits under the measure, according to Bloomberg. Pension funds and municipalities will also have to report any pension promises that exceed projected asset values as a liability.

Illinois has failed to deal with its pension system for years, leading Moody's Investor Services to give it the lowest rating of any state. Lower state ratings will likely result from the new rules, which could prompt investors to demand higher yield to compensate for heightened risks.

"People are going to be really surprised," Matt Fabian, managing director with Municipal Market Advisors, told Bloomberg. "It's one of the few things out there that could precipitate a major change in investor demand."

Pension fund investing has hit a snag in recent days, with market giant JP Morgan reporting recent trading losses of $2 billion. Investment managers interviewed by Pensions & Investments indicated they weren't concerned about their own investments managed by the bank, but suspected financial institutions have not learned their lessons from the financial crisis.