Not The Correct Objective

The WSJ published an article today titled, “America’s Pension Funds Fell Short in 2019”. The subtitle to the article mentioned that public pension plans with assets greater than $1 billion generated a median return of 6.79% during the fiscal year ending June 30, 2019.  Wilshire Trust Universe Comparison Service produced and published this information. The 6.79% was the weakest annual return since 2016 for these large funds and it fell short of the 7.25% average return on asset assumption (ROA) for plans of this size.

Given the fact that the average funded ratio for public pension systems in only 73% (under GASB accounting standards) just meeting the ROA target is going to do nothing to close the funding gap. But, more importantly, the primary objective in managing a pension plan shouldn’t be return focused. The primary objective should be to SECURE the promised benefits at low cost and reasonable risk. Furthermore, public pension systems should adopt a greater liability focus. I am always intrigued by the fact that plans generally know the total plan assets that they have on a daily basis, but can’t tell you what the plan’s liabilities are except on an annual basis (maybe).

In an environment of greater liability transparency and one that has liabilities measured on a mark-to-market basis, a year like 2019, in which the median large public plan generated a 6.79% return, may not be so bad if that return exceeded liability growth. Because the liabilities are bond-like in that their value rises and falls with changes in interest rates, liability growth could be negative. Does a plan really need to generate the 7.25% ROA in such an environment? Hell no. We need public pension systems to produce returns that exceed the growth in their liabilities- nothing more and certainly nothing less.

It may be a fun exercise to see how the median public pension system is performing, but given the fact that every pension’s liabilities are like snow flakes, it really is a worthless comparison. Pension plan trustees would be better served and they could make more informed decisions if we used the appropriate benchmark to measure plan assets versus plan specific liabilities.

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