Is It Really The Fed’s Fault?

There appeared an article in Seeking Alpha (8/26) titled, “Blame The Fed For The Coming Pension Fund Crisis” that railed against the impact that lower U.S. interest rates are having on Pension America that has witnessed, on average, a 27.5% decline in the fund status for all U.S. pensions since 2001 from 100% to today’s 72.5%. Ironically, they weren’t even focused on the liability side of the ledger, which certainly would show a great escalation in the value of future promises if plans used a mark-to-market valuation approach (but, alas, they don’t), thus driving the average funded ratio further into the hole.

They correctly pointed out that the lower interest rates of the last 2-3 decades have forced pension systems to seek greater exposure to equities and alternatives, as the potential return associated with both cash and bonds had become less compelling. The result has been the injection of greater risk into the asset allocation process and more uncertainty as to whether or not future benefit payments would, in fact, be met.

However, this article with all of its charts from various providers, including Bloomberg, Wilshire, Pew Charitable Trust, NASRA, etc., failed to highlight the fact that the continuing focus on the return on asset assumption (ROA) to drive pension returns has directly lead to this funding crisis. Had Pension America continued to engage in defeasance strategies for their promises (liabilities), as they had for much of the 50s to 70s, and managed these plans as if they were lottery systems, pension America wouldn’t be facing the ever-increasing pension expenses to meet these future promises. Furthermore, the plan participants, such as those in critical and declining multiemployer pension plans, wouldn’t be gnawing their fingers to the bones, as one plan after another files for benefit relief under MPRA and more plan participants see dramatic cuts to their monthly checks.

When will we learn? Will it take the third major stock market crash in the last 2+ decades to finally wake up folks to the fact that the up and down asset allocation rollercoaster is not appropriate and eventually collapses? There was another article today in The Atlantic that stated that the next recession will “destroy millennials” (how comforting). Do we really want generation after generation of Americans struggling to survive?

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