Just Shifting Deck Chairs On The Titanic

You may not have been following KCS’s blog in January of this past year when we produced the following blog post. We questioned the logic of focusing on the ROA as the plan’s primary objective.  We especially challenged the notion that shifting a couple of percent from one asset class to another would produce meaningful results for the pension system. Clearly, given the results produced by asset classes in 2018, it didn’t matter where you placed your assets. There really weren’t any places to hide. Here is that post.

An article appears in today’s WSJ highlighting a dilemma for U.S. public pension plans, but it could be addressing a similar concern for all DB plans, including multiemployer and private plans, that continue to focus on the return on asset assumption (ROA) as the primary objective for both plan sponsors and their asset consultants. You see, most of the retirement community has been sold a bag of rotten goods claiming that a plan needs to generate the ROA or it will not meet its funding goals.  Hogwash!

So, when valuations for most asset classes seem to be stretched, where does a pension plan go to allocate their plan’s assets? Well, this “issue” has plan sponsors once again scratching their collective heads and doing the Curly shuffle.  You see, they have once again through the presumed support of their consultants, begun to approach asset allocation as nothing more than rearranging the deck chairs on the Titanic.

Despite tremendous gains from both equity and fixed income bull markets, these plans are willing to “let it ride” instead of altering their approach to possibly reduce risk, stabilize the funded status, and moderate contribution expense. Can you believe that the California State Teachers Retirement System, the country’s second-largest public plan, has recently decided to roll back fixed income exposure by 2% and equity exposure by 1% from 55% to 54%?  Are you kidding me? Is that truly meaningful or heroic?

Please note that generating a return commensurate with the ROA is not going to guarantee success.  Furthermore, since most public pension plans are currently woefully funded on an actuarial basis, meeting this objective will only further exacerbate the UAAL.

These plans don’t need the status quo approach that has been tried for decades. Real pension reform must be implemented before these plans are no longer sustainable, despite the claim that they are perpetual.  As an industry, we have an obligation to ensure the promised benefits are there when needed. Doing the same old, same old places our ability to meet this responsibility in jeopardy. If valuations are truly stretched, why allow your allocations to remain basically stagnant?

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