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!
Pingback: Real Progress – But Hidden from View – Ryan ALM Blog
Pingback: A few Pension Facts – Ryan ALM Blog