There is little question that passing the Butch Lewis Act is of paramount importance for the roughly 114 Critical and Declining multiemployer pension systems. These plans are forecast to become insolvent within the next 15 years, and many much sooner, and without the benefit of a lifeline in the form of a low-interest rate loan, little can be done to rescue them at this time. It is incredibly unfortunate that plan participants are facing potentially catastrophic benefit cuts. Shameful, actually!
Hopefully, Republican and Democratic Senators and House of Representatives members will work together to overcome their philosophical differences to find a working solution to this unfolding pension crisis. Yesterday was actually too late in some cases.
However, while we wait, there are roughly 1,300 additional multiemployer plans not facing the prospect of imminent collapse. These plans have the luxury of more time to work through their funding shortfalls, but doing the same old, same old is not the answer. Why? Continued focus on the return on asset assumption (ROA) as the primary objective subjects these plans to the potential volatility associated with market corrections. As everyone realizes, we are currently participating in the longest U.S. equity bull market ever recorded (>9 1/2 years).
There is a way to protect the assets in these plans, but it will take a new approach to accomplish the objective. Ryan ALM and KCS are presenting to the Florida Public Pension Trustees Association on Monday, October 1st. The topic is “How to Enhance the Funded Status” and we will be showcasing an alternative approach to asset allocation one in which the fund’s assets are bifurcated into de-risking assets and growth assets. The de-risking assets are fixed income securities used to cash flow match projected benefit payments net of contributions, while the growth assets get the benefit of a longer investment horizon to meet future liabilities.
We will be presenting what we believe is the MODEL on how pension systems should operate. It is a unique approach, but not different just to be different. Our system uses strategies employed when defined benefit systems were first introduced. Please remember that managing a DB plan is about meeting the promised benefit at the lowest cost and modest risk, and not at the highest return. Unfortunately, asset allocation models are currently overweight equities. Does that truly make sense in this environment?
We need the BLA passed, but we also need the balance of multiemployer pension systems to adopt a more appropriate process before the markets sabotage current funded ratios and contribution expenses forcing many DB systems designated Critical into a worsening situation. We are happy to share our insights with you.