By: Russ Kamp, Managing Director, Ryan ALM, Inc.

P&I has produced an article highlighting the fact that money managers recaptured nearly half of the institutional assets lost (-$9 trillion) in 2022’s market correction. They mention that this was accomplished despite “lingering economic and political uncertainties that kept a lot of money sidelined, including a record $6 trillion parked in money market funds alone.”

According to Pensions & Investments’ 2023 survey of the largest money managers, institutional assets for 411 managers around the globe rose 9.7%, or $4.89 trillion, to $55.23 trillion as of Dec. 31, 2023 for a recovery rate of 52.5%. This recapture of assets was primarily driven by equities, both US (+26%) and global X US (+18%), while bonds were up 5.6% domestically and abroad.

Obviously, it was great to see the “rally” despite wide-spread uncertainty related to the economy, inflation, interest rates, and the labor market. Issues that are still impacting perceptions today. But the real question one should ask has to do with the cyclical nature of markets and what plan sponsors and their advisors can do to mitigate the peaks and valleys. As I reported earlier this week, since 2000, public pension plans have seen a tripling (or more) in contribution expenses as a % of pay, while the funded status of Piscataqua research’s universe of 127 state and local plans has fallen by 25%.

Isn’t it time to get off the asset allocation rollercoaster? The nearly singular focus on return (ROA) by pension plan sponsors has placed pension funding on a ride that does little to guarantee success, but has certainly exacerbated volatility. In the process, contributions into these critically important retirement systems have skyrocketed. Let’s stop thinking that the only way to fund pensions is through outsized market returns. Today’s interest rate environment is providing plan sponsors with a wonderful opportunity to SECURE a portion of their future promises by carefully constructing a defeased bond portfolio that matches and funds asset cash flows of principal and interest with liability cash flows of benefits and expenses.

By doing so, you eliminate the impact of drawdowns, as the assets and liabilities will now move in tandem. How refreshing! Because you are defeasing a future benefit, you are also eliminating interest rate risk, as future values are not interest rate sensitive. Furthermore, you have now created a liquidity profile that is enhanced, as the bond portfolio now pays all of the benefits and expenses chronologically as far into the future as the allocation to the cash flow matching program lasts. Lastly, the growth or alpha assets can now grow unencumbered, as they are no longer a source of funding. The need for a cash sweep has been replaced by cash flow matching with bonds.

Let’s stop having to celebrate recovery rates of roughly 50%, when we can institute investment programs that eliminate these massive and harmful drawdowns. They aren’t helpful to the sustainability of DB pension plans, which we so desperately need if we are to provide a dignified retirement to the American worker. Let’s get back to the fundamentals, as the true objective of a pension is to fund benefits in a cost-efficient manner with prudent risk. It isn’t a performance arms race!