Just Shifting Deck Chairs On The Titanic!

Los Angeles County Employees’ Retirement Association (LACERA) is considering adopting a new asset allocation change.  Under the new proposal, the “growth” category (global equity, private equity, and real estate) will see a 4% reduction from 50% to 47%.  However, private equity will see an increase from 9% to 10%. In addition, the credit bucket will increase from 7% to 12%, with Bank Loans, illiquid credit, and emerging market debt increasing. Haven’t we seen this use of illiquid assets negative exacerbate returns among endowments & foundations during the great financial crisis?

As we’ve discussed many times, the primary objective of any DB plan is to meet the promised benefits at the lowest cost, not the highest return. These recommendations have been put forward by the plan’s asset consultant, who we are sure spent a lot of time and resources to come up with this suggested change, but is this truly meaningful? In our opinion, DB plans need to return to the basics (focus on liabilities to drive asset allocation decisions), and not strive for a few basis points of excess return that also reduces the plan’s liquidity to meet the benefits.

Unfortunately, this asset allocation exercise is similar to others done on a regular basis, but at the end of the day proves to be meaningless. Does anyone really believe that increasing private equity by 1% will have a meaningful impact on a plan’s funded status or contribution expenses? Of course not! Let’s stop doing the same old, same old, and finally start to propose real and effective change. I’m tired of seeing pension plans just moving incrementally. At the end of the day the shifting of deck chairs on the Titanic didn’t really matter – did it?

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