Liabilities – the Cinderella of the DB world

There is lots happening in Pension America on both the asset and liability side of the equation.  As anyone who regularly reads our blog would know, the asset side of the equation gets all the attention, while liabilities are the poor stepchild, rarely being invited to the quarterly review table, if at all.  Why?  Liabilities aren’t fancy!  In fact, they are kind of boring, and so are the actuaries that calculate the benefits that are accruing within these retirement plans.  They’re math geeks.

The asset management side of the equation has a ton of excitement.  The various markets go up, down and sideways, and that may be in a single trading day or even an hour of the day.  Furthermore, you can invest anywhere in the world, and in an amazing array of strategies. Investment management professionals get to wax poetically (except for the math / quant geeks that live on the asset side) as to why they own a particular bond, stock, derivative, company, building, commodity, etc. Oh, what fun!  With glee usually reserved for children on Christmas morning, plan sponsors set out to hire many different shops to fill various asset class exposures and styles within those asset classes, conducting endless manager searches all with the HOPE that they will put together a combination of managers / products that will generate a total fund return at or above their return on asset assumption (8% for 49% of US public funds).

Plan sponsors have been told for years by their asset consultants, actuaries and the Government Accounting Standards Board (GASB) that earning or exceeding the ROA would “insure” solvency for their plans. But alas, something happened on the yellow brick road to the Emerald City.  Many plans generated returns that eclipsed the return objective, and over lengthy periods of time, only to have funded ratios plummet and contribution costs escalate.  This couldn’t happen said all the powers that be. But, it did, and there have been and will continue to be severe consequences.

We’ve witnessed the collapse of the DB plan as the primary retirement vehicle, replaced by the newer, shiny, employee controlled defined contribution plan.  Instead of a monthly payout that survives with you until you don’t, we get inadequate account balances, premature withdrawals, loans, inappropriate asset allocation decisions, greater cost, and lump sum distributions. Pandora’s Box is tame by comparison.

Well, continue to avoid liabilities at your peril.  Hosting a quarterly review meeting? You better think twice before you fail to invite liabilities to the conversation.  As you may begin to realize, 2014 was a lousy year for Pension America.  I know, assets were up, and in many cases the ROA was achieved, but liabilities, the ugly stepchild, generated a return that dwarfed asset growth, further depressing funded ratios and likely escalating contribution costs.

GASB 67/68 is upon us, and with the new legislation comes an opportunity to right a wrong.  Spend some time getting to know your liabilities. If you are too shy, we’d be happy to assist you with the introduction.  The new rules under this legislation require you to take some action (such as an asset exhaustion test).  In the case of NJ, the realization was an unfunded liability that more than doubled to a staggering $83 billion.  We need to preserve DB plans. At KCS we think that focusing on the liability side, as opposed to the asset side, will give your plan a greater probability of success. We stand ready to assist you.

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