The expectation that rates would have to rise following QE1, QE2, QE3, QE forever, has mislead DB plan sponsors into reducing core fixed income, chasing yield that injected more risk / illiquidity into the plan, while widening the asset allocation mismatch between assets and liabilities. We’ll discuss in another blog post the devastating impact of adding hedge funds and commodities in 2009, while simultaneously reducing traditional equity and fixed income beta product.
The sharp move down in rates for US 10- and 30-year Treasury bonds in 2014 has catapulted liability growth versus asset growth. 2014 is shaping up to be nearly as bad as 2011 in the performance of assets versus a plan’s liabilities, and it may exceed the hit we took in 2011 if the current market activity continues. How many plan sponsors and their consultants are focused on this trend?
So, as an industry we can continue to focus on the return on asset assumption (ROA), believing (hoping) that the ROA is truly reflective of liability growth – it isn’t – or we can put into play a new game plan that actually uses a plan’s liabilities to drive investment structure and asset allocation.
We’ve been discussing this concept for 3 years. We’ve presented our thoughts through multiple media outlets. We’ve been trying to convince plan sponsors that the ROA is not the correct benchmark, but because everyone focuses there we must be wrong, insane, etc. What will it take to get sponsors to realize that doing the same thing over and over, while expecting a different outcome is silly!
We have many thoughts on how best to use your fixed income in this low rate environment. Given the economic issues we are facing on a global basis, low rates might just be the new normal. If so, we better adjust our game plan or the remaining 24,000 DB plans will go away just as the 125,000 have disappeared since 1986.