I had the great pleasure to attend Ron Ryan’s presentation yesterday at the Florida Public Pension Trustees Association (FPPTA) Conference in Naples, FL. As many of you know, Ron is a pioneer in indexing dating back to his days when he was the Head of Research for Lehman, and he and his team created the Lehman Aggregate index and its component pieces (sub indexes).
Ron’s firm today, Ryan ALM, is focused on securing the promises made (liabilities) within defined benefit plans. Both he and I are trying to refocus the industry on why paying greater attention to a plan’s liabilities helps plan sponsors do a better job of creating a more sound investment structure and asset allocation.
Getting a better feel for the liabilities doesn’t mean spending more time understanding the output from one’s annual actuarial report. It does mean using a tool, such as a custom liability index (CLI) to measure the interest rate sensitivity, growth rate and term structure of the plan’s liabilities. With this information, plan sponsors can begin to take risk off when it is appropriate to do so, and conversely, become more aggressive when the need arises.
As an industry we have spent an inordinate amount of time focused exclusively on the return on asset assumption (ROA), and not nearly enough time, if any, on the liabilities, which is the only reason that the plan exists in the first place. Asset allocation should reflect the funded ratio and funded status of the DB plan. A 90% funded plan should have a very different asset allocation and risk profile from that of a 50% funded plan. How are your liabilities performing in this environment?