Milliman, Inc. has released the latest update for their Public Pension Funding Index (PPFI), which covers the nations largest 100 public plans, and it indicates a slight pickup in the aggregate funded status from 72% to 73% as of June 30, 2017. Obviously, any improvement is a good sign, but what will plan sponsors do in response? The U.S. equity market has enjoyed a nearly unprecedented bull market run since March 2009. Despite this significant advance, funded status is still quite weak. What happens to public plans once this equity market peaks and begins to slide?
We believe that every pension plan should have a de-risking mind-set, and a glide path by which it removes risk as funded status improves. Sitting with a traditional asset allocation, when both bonds and stocks are nearing peak performance for their respective cycles, is not prudent. However, if the focus remains on the return on asset assumption as the primary objective, it is highly likely that public DB plans will continue to swing for the fences.
We’ve seen this mind-set creep into professional baseball during the last couple of decades, and what we’ve seen is a few more homers, but many more strikeouts. At KCS, we don’t think that Pension America nor the employees, employers, or tax-payers who fund these plans can afford more strikeouts at this time! The funded status of public pension plans got hammered in both 2000-2002 and 2007-2009. We are seeing public DB plans eliminated and frozen during a period of time that has been favorable for traditional asset allocation strategies. Can you imagine what will happen should we enter bear market territory for either or both of these asset classes?
DB plans are incredibly important for the average plan participant’s financial well-being. Let’s not screw up their futures by focusing on the wrong objective at this time. DB plans should be striving to meet the promised benefits at the lowest cost, not the greatest return. Striving for the latter guarantees more volatility, but not the promise of delivery.