I happened to catch an AP note titled, “New Mexico Lawmakers Take Stock of Pension Liabilities”, and my heart began to flutter, as I thought that FINALLY, a pension system was going to manage their fund through a more transparent liability lens. Silly me!

When I read the note it mentioned that members of a legislative committee are just taking stock of mounting liabilities at New Mexico’s two major public pension funds in the wake of a downgrade of the state’s credit rating by Moody’s Investor Service, which cited large pension liabilities as the reason for the downgrade. Shocking.

It really shouldn’t have come as a surprise to that governing body, or any other public entity, that those pension liabilities are burgeoning, and the impact on state budgets is becoming more onerous. Plan sponsors can and should begin to tackle this issue by becoming more liability aware and using the output from liability modeling to drive investment structure and asset allocation decisions that will help to stabilize the plan’s funded status and contribution expense.

As we’ve mentioned numerous times, public pension systems need to be preserved for the millions of participants counting on the promised benefits but managing them with only an asset-focused approach hasn’t worked and we don’t believe that it will work in the future. New Mexico’s legislators and the plan sponsors need to understand the liability’s term structure, growth rate, and interest rate sensitivity as the first step in managing the pension system and not the last step after a downgrade.