Northern Trust Asset Management (NTAM) is out with a report titled, “Corporate Pensions: The Bottom Line”. NTAM believes that it is critically important for corporate plan sponsors to understand the impact that the DB plan has on corporate finances and ultimately the company’s stock price if a public entity. As a result, they are recommending that plan sponsors adopt de-risking approaches to lock in recent improvements in the funded status of the pension plans, which according to the report improved from 81% to 85% in 2017, as rates backed up and equity market returns exceeded long-term averages.
Many corporations have adopted de-risking strategies for years, and it is reflected in the average asset allocation, which shows a considerable shift to fixed income for S&P 500 companies (now 43% from 31% 10-years ago), while equity allocations have fallen to 37% from 60% during the same timeframe.
I agree wholeheartedly with this approach, but why stop at corporate plans? Public and multiemployer plans also have a profound impact on their sponsoring organizations. Whether it is the taxpayer supporting the public pension system or the businesses funding multiemployer systems, subjecting pension plans with improved funded status to the market volatility this late in the cycle is foolish.
DB pensions need to be protected, but they won’t be if the cost of preserving them overwhelms the ability to fund them. We are already witnessing chinks in the armor, as public DB systems are having to create new tiers to amend contribution rates, benefits, retirement ages, or worse, the adoption of DC plans in lieu of DB systems. It isn’t any different in the multiemployer space where 114 “Critical and Declining” plans are on the brink of insolvency.
As we’ve said many, many times, managing a pension system is not about the return (ROA), but meeting the promised benefit at the lowest cost. Chasing an ROA this late in the bull market ensures greater volatility but not necessarily the commensurate return. Don’t allow your recent success to be wasted. We will eventually have a market decline and most pension systems are not in financial shape to weather the next storm.
Millions of American workers are counting on this benefit to be there when they retire. There will be devastating social and economic ramifications should we fail to preserve these essential retirement benefits. KCS and Ryan ALM have teamed together to create a de-risking process designed to protect and preserve the plan’s funded status and establish a glide-path toward full funding while doing so at a significantly reduced cost.