Cheiron Advisory: LDROM for Public Plans
A pension plan is obligated to make its promised future benefit payments. Liability measures like LDROM and Actuarial Liability are present values of the total benefit payments attributable to past service.
For these measures, the total benefit payments are discounted to a present value as of the valuation date using the expected return on assets for the reference investment portfolio. Because the low-default-risk portfolio normally has a much lower expected return, it produces a much higher liability measure than the Actuarial Liability.
The difference between LDROM and the Actuarial Liability can be viewed as the expected savings from investing in a diversified portfolio instead of a low-default-risk portfolio. Actual savings will depend on how the diversified portfolio performs. The difference can also be viewed as the cost of eliminating investment risk.
When calculating LDROM for a risk-sharing plan, expected benefits can be projected either assuming plan assets are invested (1) in low-default-risk investments or (2) in the plan's diversified portfolio.
The resulting LDROM may be very different depending on this choice, and the interpretation of either measure can be difficult. Risk-sharing plans are not designed to have their assets invested in low-default-risk investments, and the expected benefit payments are not fixed but vary with investment returns.