First, my colleagues at KCS and I would like to wish you and your families a very Happy New Year filled with great health, lots of laughter, and much prosperity!
2015 is over, and as you will soon find out, it was not a good year for DB pension plans. This marks the second consecutive year in which pension funds have missed their ROA targets. However, unlike 2014 when plan assets also dramatically underperformed liabilities, 2015 will likely reveal that most total funds were flat to slightly UP versus their liabilities last year.
That said, funded ratios likely fell since liabilities aren’t marked to market while assets are, and funded status likely further deteriorated, which will negatively impact contribution costs. What, if anything, are you going to do about this? Unfortunately, this trend has been evident for more than 15 years now, and nothing seems to have been done.
Well, something needs to be done! Striving to achieve the ROA has lead to asset allocation decisions that have greatly increased volatility, but certainly not the probability of success. Adopting a strategy that pays heed to a plan’s specific liabilities, in addition to the assets, will likely lead to a very different asset allocation, especially within traditional fixed income.
Are you ready to learn more?