It’s Not The ROA

The WSJ’s Heather Gillers wrote an article in today’s edition titled, “Pension Funds Still Making Promises They Probably Can’t Keep”.  Always glad to see pension plans get some air time in the WSJ, but would really appreciate a new slant on what is truly happening.

As always, the theme of the article is the “failure” on the part of Pension America to achieve the proverbial Holy Grail return on asset assumption (ROA). As many of you know, defined benefit (DB) plans used to be managed against their liabilities, and quite effectively. There are many reasons why this changed, but I would assign a fairly significant role to the advent of the asset consulting community, who in trying to justify their existence created a sea change that had plan sponsors seeking return, and naturally, the ROA was pursued at any cost.

Meeting the promise (benefits) at the lowest cost possible had been a very successful strategy. The dramatic shift from low cost to high return has created the funding nightmare that was addressed in the WSJ article. Unfortunately, the problem is even worse than what was articulated, as GASB allows public and multiemployer plans to discount liabilities at the ROA, and not the AA Corporate rate used by corporate pension plans (FASB). This masking of the true liability shortchanges these plans each year, as contributions don’t match what should actually be deposited.

There are several strategies that should be used by plan sponsors that would help get these plans back on a stronger footing that isn’t dependent on generating a return that exceeds the ROA objective. DB plans need to be preserved for the masses, as asking untrained workers to fund, manage, and disperse a retirement benefit through a DC plan is just poor public policy.

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