There appears an article in today’s WSJ (Brexit adds to pension funds’ pain
http://on.wsj.com/2a0F3zJ), that is long overdue. “Brexit should be a wake-up call for pension plans because it means interest rates are going to stay low or go lower and it makes it even less likely [the plans] are going to achieve the 7.5% rate of return that most of them are assuming,” said former San Jose, Calif., Mayor Chuck Reed.
Rip Van Winkle slept for a shorter period of time than many plan sponsors and asset consultants have with regard to this issue. The continuing focus on the return on asset assumption (ROA) has lead to a significant mismatch between assets and liabilities, which continues to be exacerbated by the declining U.S. interest rates. The impact on private DB plans is more immediate than public funds (accounting differences between FASB and GASB), but both are hurt by their unwillingness to focus on plan liabilities as the primary objective.
Since KCS’s inception (8/1/11), we have frequently written and spoken on the subject of plan liabilities needing to be the plan’s primary objective. We recently presented the output from a project that we were asked to do for a large public pension plan. The project was to restructure the plan’s fixed income assets. With a focus on the plan’s liabilities, we put together a program that shortened duration (1/2 year), enhanced income (roughly +$750,000), reduced management fees (roughly -$500,000), improved liquidity, while insuring that the plan’s liabilities were covered for the next 10 years.
If this all seems too good to be true, we encourage you to reach out to us to find out more. Achieving the plan’s ROA doesn’t guarantee success. Focusing on your plan’s liabilities is a necessary path forward to improving funding success. Our beneficiaries are depending on all of us to secure the promised benefit.