Managing a defined benefit (DB) plan has never been easy, but it used to be simpler. Why? The true objective of a pension plan should be to meet the promised benefits at the lowest cost and with manageable risk. This used to be the standard! Unfortunately, somewhere along the way, the “objective” became a return game – the return on asset (ROA) assumption.
This change in focus has lead to instability in the plan’s funded status and excessive volatility in contribution expense. DB plans are all but gone in the private sector, but they are still quite prevalent in the public and multiemployer arenas. Will that continue to be the case? Not unless we go back to the future! Perhaps circa 1970 (pre-ERISA) when DB plans, like lottery systems, defeased their plan’s liabilities, ensuring that the assets would be there to meet future benefit payments. Almost simple!
Many corporate plans have undertaken such an action and their plans are much more stable. They have used duration matching, annuity buyouts, and cash matching strategies to accomplish their objective. However, we believe that cash matching is the most cost-effective and precise method to match and fund a plan’s liabilities, and it is this implementation that is highlighted in the Butch Lewis Act that we’ve discussed on this blog.
We would be happy to share with you our insights and approach about how a cash matching defeasement strategy could help stabilize your plan’s funded ratio and contribution cost while setting the plan on a glide path toward full funding. As we’ve said many times, DB plans need to be protected but pursuing the same failed strategies (ie chasing returns) is not the way to accomplish your objective. Remember, managing a pension plan is about cost, not return.