The Asset / Liability Mismatch is a Killer

Defined benefit plans are once again being stressed today. Assets are getting whacked, while interest rates plummet, leading to significant growth in plan liabilities.  In fact, liability growth is estimated to be about 15% year-to-date on a mark-to market basis (Ryan ALM), while assets are mostly flat to up marginally (at least until this morning).

Traditional approaches to asset allocation continue to reduce fixed income exposure, as asset consultants anticipate higher rates, while not being able to justify holding bonds at these “historically” low rates.  Unfortunately, this action has lead to a huge asset / liability mismatch, that continues to put pressure on funded ratios, funded status and contribution costs as rates continue to fall.

At KCS we have been espousing a very different asset allocation model that allocates plan assets to beta and alpha buckets.  In our approach we convert traditional fixed income into a liability beta portfolio eliminating interest rate sensitivity, while dramatically improving liquidity.  In addition, this approach extends the investing horizon for the alpha assets which can now capture the liquidity premium that exists, but often isn’t captured through premature selling.

I am very much looking forward to speaking at the FPPTA conference next week, as I will be re-introducing this topic.  DB Plans cannot afford to live with the excessive volatility associated with pursuing the ROA. NOW is time for change before the DB plan goes by the way of the dinosaur.


Competition is Fierce – Resources Precious

For anyone who follows the KCS blog on a regular basis you understand how concerned we are about the U.S. worker’s lack of retirement readiness.  Unfortunately, we aren’t making much progress, and in fact, our ability to meet short-term obligations is getting strained too, let alone our long-term obligations (retirement).

In a recent poll conducted by Bankrate, 46% of Americans don’t have enough savings to cover 3 months of expenses, and more than 50% of them don’t have any emergency funds. Regrettably, 62% of our population couldn’t cover 5 months of expenses should they find themselves out of a job.

Competition for our discretionary income is fierce, as Americans are being asked to fund retirements (DC, as opposed to DB), greater health care expenses, and ever-expanding education costs, in an environment in which real incomes have been stagnant for quite some time. For those Americans who find themselves earning less than the median family income, life gets in the way, and it is proving very difficult to be able to cobble together an emergency fund.  This, in an environment in which we are told that we are at “full employment” (4.7%), despite having 93 million age-eligible (16-65 year old) workers on the sidelines.

The demise of the traditional defined benefit plan is going to lead to profound social and economic ramifications in the next 15-20 years and beyond. Providing our students with greater financial literacy will help, but it isn’t a silver bullet. We need U.S. companies investing in their businesses and employees.  It is through a growing economy, with real wage growth, that we can begin to ease some of the financial burden that most Americans are now facing.




Be Revolutionary – Not Evolutionary

I read the following  from Joe Magnacca, CEO at Massage Envy, with great interest, and I wanted to share it with the KCS readership.

Taking strategic risks could be your best business bet

I’ll be the first to tell you that taking risks can be scary, whether it’s rebuilding a brand or embracing a new business model. But it’s vital to success in business.

 Obviously, there is no formula for risk-taking, because every business, budget and leader is different.  But, there are successful ways to take risks.

 Be Revolutionary – Not Evolutionary

Risk is not just about embracing change, but having the courage to create it. I’ve found that people tend to understand that change needs to happen. For some leaders though, they are naturally risk-adverse, so they are challenged to drive the necessary change.

Being a catalyst for change means that you need to consider what happens to your business or a category in the next year and then three years from now and then five years from now.  Having a vision of how the future of your business needs to look plus a willingness to take necessarily risks will allow you to implement change that will pay off in the future.

 Do Not Fear Failure – But Prepare for It

Asking, “What’s the worst that can happen?” is a vital first step in evaluating risk. But it’s not a question to ask only in a rhetorical sense. 

You actually need to consider all the contingencies and plan for what could happen. At the same time, you should also be planning for how to quickly scale your idea if it proves successful. I remember telling a previous team that the result of a risk was either going to put them in a position of affording a private jet – or they would be looking for a job. There’s nothing wrong with taking a flying leap. But just in case, have a parachute to fall back on.

 Give Teams Permission to Think

A critical part of business risk-taking is giving your teams the confidence to think less traditionally.

Innovation is what encourages and grows people, so set the example of giving your team room to think outside of the box. 

 I don’t fight innovation, whether it comes from a change in technology, customer experiences or the services we provide. And that’s a huge motivator for employees when they know ideas – good, bad or ugly – have a fighting chance.

 Taking risks will force you to become more creative, inventive and calculating than you ever imagined you’d be. But to see your brand come out on the other side, hopefully stronger, streamlined and more focused than ever before, makes it all worth it. (thank you, Joe)

How many plan sponsors continue to “tinker” with their ROA, moving in quarter point increments? How has that worked out? Have funded ratios improved? Contribution costs fallen? We would hazard a guess that incremental change has brought very little reward for the considerable effort put forth. Stop tinkering!

KCS has for years been talking about making asset allocation decisions based on the funded ratio and a plan’s liabilities, not on the ROA.  It may be revolutionary to what has been done within the asset consulting business for years, but what do you have to lose? We’ve already seen substantial harm done to DB plans by inaction. Now is the time to try a different path.  Let us help you improve your funded ratio, stabilize your fund’s contribution costs, and improve the long-term viability of your plan.  Your beneficiaries can’t afford another shock to their plan.


KCS June 2016 Fireside Chat – “By Any Other…”

We are pleased to share with you the latest article in the KCS Fireside Chat series. In this edition we explore that positives and negatives of the leveraged loan market. So many investors have been forced to chase yield given the low interest rate environment.  However, does it make sense from a risk / return standpoint to access this product area?

Please don’t hesitate to reach out to us if we can be of any assistance to you.


No Help For The Weary!

Today’s employment news should send shivers through the DB pension community! Expectations (hope?) of an interest rate rise in June / July have been thwarted, as the U.S. economy added only 38,000 jobs in May.  UGH! Worse, the Labor Participation Rate fell 0.2% to 62.6% matching December 2015.  In addition, March and April employment gains were revised down by 59,000.  We haven’t seen a jobs report this weak since September 2010.

Fed Chairwoman Janet Yellen said a week ago that an increase in short-term interest rates would be appropriate “probably in the coming months” if the economy continues its upward trajectory. The strength of the labor market plays an important role in the Fed’s decision to adjust interest rates, alongside inflation and economic growth, which remain muted.

Well, it is highly unlikely that we will see a rate rise in June or July given this jobs report.  For plan sponsors that were hoping to see a rate rise, which would reduce the present value of their plan’s liabilities (corporate plans under FASB), they will have to continue to live with very low rates.  The U.S 10-year Treasury Bond has rallied 28/32nds on this news and the yield is at 1.705%.

For our retail clients, the low interest rate environment continues to constrain their returns from a moderate to conservative asset allocation profile, forcing many to eat prematurely into their principal or causing them to seek more aggressive (risky) investments to create some additional yield (HY, bank loans, etc.).

We have some ideas on how to navigate your portfolio in this environment.  Don’t hesitate to reach out to us if you think that we can help you.


%d bloggers like this: