We are pleased to provide you with the Ryan ALM Fourth Quarter newsletter. Each quarter Ron Ryan and his team provide plan sponsors an important view on how a generic liability stream, priced at market, would have performed relative to a plan sponsor’s representative asset allocation.
At the end of September, the representative asset allocation model had outperformed liabilities (marked-to-market) by more than 11%, with assets up 5.8%, while liabilities (U.S. Treasury STRIPS index) had declined by 5.3%. The >11% advantage provided plan sponsors with a significant opportunity to de-risk their plans. De-risking in our view is a way to stabilize both the funded status and contribution expense.
Unfortunately, the fourth quarter’s significant drawdown for equities and a subsequent rally in interest rates completely reversed the earlier advantage. At the quarter’s end, assets were underperforming liabilities by nearly 2%: an almost 13% reversal in just 3 months. Wow!
Regrettably, most plan sponsors, especially those that follow GASB accounting rules for the discounting of pension liabilities, rarely get a view of those liabilities except once per year. As contribution expenses have risen rapidly during the last couple of decades, we think that it is becoming critically important to initiate strategies to potential slow this escalation before state and local budgets are no longer able to sustain the burden.