The following article appeared in the WSJ yesterday.
Slowdown in state, local investment in roads, other infrastructure dents U.S. economy
We are not surprised by this news, and would be shocked if you are, too, especially given growing claims on budgets to meet contributions for healthcare and pensions. Despite this growing claim on tax revenues, we believe that DB pensions must be preserved, not only for public workers, but for the private sector, too.
Can you imagine a future economy in which the only source of revenue for a significant percentage of its residents is Social Security? We can, and the social and economic consequences from that happening will be grave. So, what needs to be done? First, DB plans need to begin to derisk. A sponsor might ask “even if they are poorly funded?” Absolutely! As we’ve discussed on many occasions, managing a pension plan shouldn’t be about achieving the ROA, but about providing the promised benefit at the lowest risk and cost possible. Trying to achieve a 7.5% ROA in this environment is proving very problematic. Plans are getting much more risk, but not the commensurate reward.
These plans must begin to stabilize their funded ratios and contribution expense. It is through this enhanced discipline that municipalities and states will be able to more appropriately meet these liabilities, while providing the necessary resources to invest in their community’s infrastructure needs. However, a new approach to the management of DB plans will need to be undertaken if they are to reduce funding volatility. The same old, same old is just not cutting it!