Happy 6th Anniversary KCS

It is hard to believe that Kamp Consulting Solutions, LLC (KCS) will be celebrating its sixth anniversary tomorrow (8/1).  It has been a very rewarding 6 years on so many levels! As we embark on year 7, we continue to focus on our mission to protect and preserve DB plans, as the primary retirement vehicle for both employers and employees.  We remain concerned about the decline in the use of DB plans, and the potentially harsh social and economic ramifications as a result of this trend.

As rewarding as these 6 years have been, it has also been very frustrating for the KCS team. Coming to the market as a new firm with a very different message and philosophy has been challenging.  We still believe that the primary objective of a DB plan is to meet the promise (liabilities) at the lowest cost, and not the ROA.  However, we are trying to change 50+ years of thinking, which has proven to be no easy feat!

As you can imagine, we owe a great deal to many people and organizations within the retirement industry that have supported our effort.  Most importantly, we’d like to thank our families who have been with us every step of the way.  There is no way that we hit the sixth-anniversary mark without their support, encouragement, and abundant patience.

As we look forward, we hope to have the opportunity to work with organizations that understand that change is absolutely necessary for the retirement industry at this time.  Doing the same old, same old hasn’t worked, and it isn’t likely to work in the future either!

When to De-risk a DB plan?

Several members of the KCS consulting team returned from the Opal Public Funds conference in Newport, RI, encouraged that DB plan sponsors were starting to understand that measuring and monitoring a plan’s liabilities is as important as following the assets on a regular basis, if not more important!  The word liabilities, often absent during previous conferences, was mentioned quite often, and not just by us or Ron Ryan.

However, as encouraged as we were, we still are concerned that plan sponsors remain skeptical of what this greater transparency and awareness of the plan’s liabilities will do for them, especially for DB plans that are underfunded.  Well, how many aren’t, especially among public and multi-employer plans?

I guess that we shouldn’t be surprised given that most sponsors (and their consultants) still feel that achieving the return on assets assumption (ROA) is the primary objective, instead of funding the benefits at the lowest cost.   With a return focus, any mention of de-risking the plan immediately raises concerns about the plan’s ability to achieve that ROA target.  While in Newport, it became apparent that most plan sponsors only feel that it is appropriate to consider a de-risking strategy when a plan is 85%-90% funded.  Why?

One of the plan sponsor panelists during the conference shared that their plan had been 104% funded at one point, but was now 68% funded (on an economic basis?).  As we’ve highlighted, most plans were fully funded at the end of the ’90s, so this story is not unique, but it is disconcerting.  Especially when one considers that after 8+ years of an equity bull market and 35 years of a bond market that has been virtually in a falling rate environment, does it make sense to believe that DB plans can generate outsized returns over the next decade?

Wouldn’t it make more sense to reduce some of the risks in the portfolio, while securing the near-term retired lives, than to subject the entire corpus to the ups and downs of the capital markets?  A de-risking strategy will be unique to each plan, as each plan’s liabilities are like snowflakes. The funded status of the plan and the plan’s ability to contribute will determine how much of the plan will be shifted to defense from offense.

We encourage plan sponsors that currently have an allocation to active fixed income to use those assets to begin the process of de-risking.  The current interest rates sensitive portfolio will be converted into a cash matching strategy that will ensure that benefits are covered for the foreseeable future while extending the investing horizon for the balance of the growth assets, whose objective is to beat liability growth.

Furthermore, liabilities are highly interest rate sensitive (like bonds), and if the U.S. economy can ever begin to produce economic growth, generate some inflation and see rates rise, the present value of the liabilities may actually decline.  Importantly, in an environment of negative liability growth, assets do not need to achieve the ROA to begin to whittle away at the funding deficit.

We encourage you to begin to de-risk your DB plans before the markets take it upon themselves to significantly impact your current funded status.  One should begin this process with a goal to fully fund the plan within 10-15 years.  A 60% funded status plan will not be fixed overnight, but a 60% funded plan that gets hit with a 25% equity market decline could be out of business before the next bull market resumes!

What’s On The First Page Of Your Performance Report?

Most DB pension committees receive a quarterly performance report, and perhaps even a monthly performance snap shot, from their asset consultant or OCIO provider.  I would hazard a guess that the performance report begins with a view of the total fund’s performance versus a hybrid index that is based on the policy allocation of a variety of asset classes.  Should that be the first comparison they see?

We would suggest that the most important metric for any DB plan is how that plan’s asset base is performing versus the plan’s specific liabilities since it is the pension promise (benefit) that has to be funded.   Unfortunately, because most plans only get an annual snap shot through their plan’s actuary, this critical comparison is nearly impossible to create.

We would equate the lack of transparency on liabilities to trying to play a football game without knowing how many points your opponent has scored.  How does a plan sponsor adjust the fund’s asset allocation, which should be dynamic, if they don’t know whether or not they are winning the pension game?

Regrettably, plan sponsors continue to be handicapped by their lack of knowledge regarding the plan’s liabilities. This lack of focus on the most important element of their DB plan has contributed to the poor funded status of pension America.  With greater focus and clarity, we would suggest that most plans would have derisked in the late ’90s when a majority of plans were significantly over-funded.

It isn’t too late to start, but time is wasting!

Cryptocurrencies and Price Volatility

In a recent KCS Fireside Chat article, we discussed cryptocurrencies (specifically Bitcoin), in which we raised concerns about the volatility in price being a possible deterrent that would likely keep these “currencies” from gaining greater mainstream use.  At the time of the article, bitcoins had declined in value from $3,018 to a little over $2,500.  Today, bitcoins are trading at just over $2,000 ($2,032) representing a 32.7% price decline since early June.  Bitcoin is not the only cryptocurrency falling in value, as the prices for most of the leading digital coins have fallen significantly in the last week.



Home Ownership and the Racial Wealth Divide

According to a recent report by the St. Louis Federal Reserve, home ownership impacts racial groups differently, in terms of wealth creation. Both black and Latino families have greater wealth concentrated in their homes than do white and Asian families.  Roughly 42% of Latino and black family wealth is tied up in their homes versus white families (25%) or Asian families (32%).

Why is this an issue? The concentration of wealth in one’s house subjects these racial groups to greater risk should housing once again come under pressure. Furthermore, this concentration of wealth in housing has kept both black and Latino families from participating to a greater extent during the recovery.

As we’ve reported in recent posts, income growth has generally been non-existent since 1999, and the concentration of wealth among the top 0.1% versus the bottom 90% has been exacerbated by stock owenership and dividends. By having most of their wealth in housing, blacks and Latinos have little left to invest in equities, bonds, and alternatives.

Furthermore, inflation-adjusted home ownership equity appreciated by only 0.5% per annum for Latino families from 1989-2013, and actually declined -0.4% per year for black families during the same timeframe.  For white and Asian families home ownership equity grew 1.2% and 2.5%, respectively.  So, not only is wealth concentrated in their homes, but their homes have seen little to no inflation-adjusted growth, leading to a greater wealth divide.

KCS July 2017 Fireside Chat – “Funny Money? Not Anymore.”

We are pleased to provide you with the latest edition of the KCS Fireside Chat series.  This article is the 60th monthly Fireside Chat that we’ve produced, and by far one of the most challenging for me to write, but that’s what makes producing these fun.
In this article we explore cryptocurrencies, and specifically bitcoins.  The price action has a lot of people excited, but concerned, at the same time.  We undertook to research this topic as a potential investment for our clients.  As you will read, we remain a little skeptical of cryptocurrencies, but want to get to know block-chain technology better.
We hope that you find this overview helpful.  As always we encourage your feedback on the subject, and please don’t hesitate to reach out to us if we can be of any assistance to you.

Choose The Path Less Taken!

I happened to see the following quote while watching the movie, “The Big Short”, and I thought that it was perfect for what is transpiring within DB pension plans.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

According to Alex Shephard, New Republic, Mark Twain never actually said this.  However, there is another quote that speaks to the same issue but is actually real.

“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt, what is laid before him.”

That quote is credited to Leo Tolstoy, from 1897, and it appears in The Kingdom of God is Within You.

Both quotes resonated with me because the entire public and multi-employer pension industry have been sold on the concept that assets and liabilities have the same growth rate.  Given that “understanding”, naturally sponsors, consultants, and actuaries are singularly focused on achieving the return on asset assumption (ROA) to meet their funding needs.

Unfortunately, assets and liabilities don’t have the same growth rate, the ROA is not the holy grail, and DB pension plans will not survive unless a new course of action is taken.  However, as stated above, because everyone is “firmly persuaded that he knows already”, trying to change 40 years of pension orthodoxy has proven nearly impossible.

We, as a nation, cannot afford the social and economic cost of our failure to provide for adequate retirements, but that is certainly the path that we have taken.  I say it is long overdue that we choose the path less taken before it is too late.