We receive a daily email from Pensiontsunami.com that contains recent pension crisis headlines. Most of the articles talk about the unsustainability of public pension plans. Here are a couple of examples from today’s list:
PENSION CRISIS HEADLINES POSTED FEBRUARY 9, 2017
- California Taxpayers on the Hook for Skyrocketing Teacher Pension Contributions (Kevin Truong / San Francisco Business Times)
- CalSTRS’ Reduced Goal Will Hit These Districts Most (Romy Varghese / Bloomberg)
- Public Pension Pilfery (Larry Sand / UnionWatch)
- Dallas Council Members Sue to Wrest Control of Pension Assets From Board (Matt Goodman / D Magazine)
- Illinois Budget Deal Hits Snag After Key Pension Bill Fails (Karen Pierog & Dave McKinney / Reuters)
- The Man Behind the Fiscal Fiasco in Illinois (Dave McKinney / Reuters)
Clearly, some of the more notable state plans are in big trouble from a funding standpoint, but the entire industry surely isn’t. Furthermore, there are strategies that can be employed to begin to improve the financial health of public pensions. However, it will take a different path than the one that has been traveled for the last 50+ years.
As we’ve said before, managing a DB plan isn’t about generating that greatest return. It is about meeting the promise at the lowest cost possible. The pursuit of the return on asset assumption (ROA) has forced plans in this low-interest rate environment to inject greater volatility into the asset allocation process. DB plans should be looking to take risk out of the equation.
Furthermore, we are discouraged by the continuous publication of headlines that predict that all DB public plans will fail (not to mention multi-employer plans, too), without offering meaningful solutions. Defined contribution plans certainly aren’t the answer, but that seems to be the only remedy being proposed. Have you seen the results of this failed model?
We, at KCS, have created a five-point de-risking solution that will stabilize a plan’s funded status and contribution expenses while beginning to return these plans to a healthier state. It starts with understanding what the promise you made looks like. Once a sponsor has their arms around that promise they can then use the output to drive investment structure and asset allocation decisions.
We know that not all DB plans have been managed appropriately, as contribution holidays have been taken, COLAs awarded and benefits enhanced without a true understanding of the long-term implications of these actions. But, with a little more discipline and a new approach, DB participants will once again be able to count on having the retirement benefit that was promised to them, and one to which they have been contributing.