That Isn’t Your Plan’s Benchmark!

Florida Retirement System tops benchmark with 0.61% for fiscal year
Florida Retirement System returned a preliminary net 0.61% in the fiscal year ended June 30, 71 basis points above its benchmark.

The above information was reported in a P&I Daily news release. Interesting information in that it continues to highlight the difficulty Pension America, particularly public pension plans, have had generating returns.  More importantly, it once again reveals the inappropriateness of most asset allocation approaches.

The total fund benchmark (-0.1%) is NOT the appropriate benchmark.  DB plans need to use their plan’s liabilities as the primary benchmark, but if they want to compare assets to something other than liabilities than the return on asset assumption (ROA) should be the proxy. The average public fund ROA is 7.61%.

To suggest that the Florida Retirement System had a decent year (ending June 30, 2016) because they beat some artificial hybrid index when they fell incredibly short of their ROA target or liability growth is misleading and wrong!

Asset allocation and investment structure decisions should be driven by a plan’s funded status and not some hybrid index. DB plans need to begin to remove risk from this effort and not inject more risk that could lead to greater contribution volatility.

 

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