On August 6th we wrote a post titled, “Not The Correct Objective”, which received a lot of positive feedback. One of the commenters shared the following:
An older gentleman currently retired and living in Boca Raton, Florida was asked how he was able to retire to such a lovely place, and he responded that he was fortunate to have saved some money and made some good investments during his working years. The person asking the questions then asked if his investments had beaten the market. Our retiree quickly commented that he had no idea, but he didn’t think it mattered since he was able to retire to Boca. We agree!
A plan sponsor shouldn’t be overly concerned with achieving the ROA if in fact her plan has built enough assets (through investments and contributions) to meet the promised benefits. As we’ve mentioned many times, the present value of future liabilities will rise and fall with changes in U.S. interest rates. In a flat to rising interest rate environment, asset growth doesn’t have to exceed the ROA objective to be able to beat liability growth. Unfortunately, most pension plans don’t see how the liabilities are performing on a quarterly basis, so comparing assets to liabilities, the only thing that matters, is an impossible exercise. That is regrettable.