How have defined benefit plans faired in 2019? That depends very much on how you measure pension liabilities. If you believe that liabilities and assets grow at the same rate (the ROA under GASB), then 2019 is a very strong year for pension America’s public funds and multiemployer plans.  If, however, you believe that liabilities should be measured on an economic value basis, 2019 is proving to be a challenging year once again.

Let’s take a look at the numbers. Using a generic, and fairly conservative, asset allocation to represent pension assets of cash (5%), bonds (30%), domestic equities (60%) and international equities (5%), one gets a return of 15.7% year-to-date through September 30th. For plans that use GASB to measure and monitor liabilities, a 7.5% ROA objective would have liabilities appreciating by 5.6% YTD. Under that microscope, Pension America would be enjoying a banner year.

However, the Society of Actuaries produced a seminal piece in 2004 titled, “Principals underlying Asset Liability Management (ALM)” that stated the following: “Accounting and actuarial measures can sometimes distort economic reality and produce results inconsistent with economic value.” Given their desire to see the facts, and nothing but the facts (thanks, Sergeant Friday), let’s look at how pension America would be doing this year if plan liabilities were shown on an economic basis.  According to Ryan ALM, liabilities valued at the Treasury STRIPS curve would produce a 17.6% year-to-date return exceeding asset growth by 1.9% so far.

For corporate America, the year is even more challenging, as liability growth under ASC 715/FAS 158 would be 21.6% YTD. Ouch! What is right? Do we truly believe that assets and liabilities grow at the same rate? We know that liabilities are highly interest-rate sensitive and are bond-like in their price movement. Do we value equities and bonds at the same growth rate? Of course not. Given the recent significant move down in U.S. rates, liability growth has been robust. What we need is a protracted and sustained period of economic growth, a bit more inflation, and finally rising rates to keep liability growth in check.  In that environment liability growth could actually produce a negative return, making it far easier for assets to outperform liabilities. Regrettably, inflation isn’t on the horizon, economic growth is waning globally, and U.S. interest rates are not likely to rise substantially from these depressed levels. But, pretending that your liabilities have only grown by 5.6% YTD is very ostrich-like.