I have just returned from Las Vegas, NV where I was very pleased to participate in the most recent CORPaTH conference. This organization should be applauded for their continued work to preserve and protect defined benefit pension plans as the backbone of the U.S. retirement industry. Importantly, their mission mirrors ours at KCS, which is why I was honored to be asked to speak on one of the panels.
The panel that I participated on involved three senior consultants from leading asset consulting firms and KCS, which was by far the smallest and least well-known entity. We were each given an opportunity to provide an overview of the current state of the retirement industry. What became obvious to me was the continued focus by these leading firms/consultants on the asset side of the equation, as each stated how difficult it will be in the near-term to generate returns commensurate with a plan’s return on asset objective (ROA). I don’t disagree.
However, we believe that trying to cobble together a collection of asset classes and investment products has always been a challenging problem. There is great uncertainty over short to intermediate timeframes, and worse, there is no assurance that meeting or exceeding one’s ROA will guarantee funding success (please see KCS’s May 2016 Fireside Chat). To this point, we believe that managing a pension plan should be about delivering the promise at the lowest cost.
But, this entails getting one’s arms around the plan’s specific liabilities, and an update from the plan’s actuary once per year is not nearly often enough. Why is it the plan sponsors can tell you on a monthly, if not daily, basis what the market value of their plan’s assets is, but they truly don’t have a feel for the liabilities? We believe that by changing the focus from assets to liabilities, one can set the plan on a derisking path to full-funding in which both the funded status and contribution expense become less volatile. Wouldn’t that appeal to you?
The plan’s funded status should drive investment structure and asset allocation decisions. It should not be some “estimated” ROA. DB plans need to be protected and preserved but doing the same thing over and over, which hasn’t brought funding success to most plans, is certainly not the way to proceed. Embrace your plan’s liabilities, and this new found insight might just lead to your plan achieving greater success.