Here we Go Again?

My wife and I are blessed with four grandchildren, and with that gift comes many opportunities to “sing” nursery rhymes to our little ones.  One of my favorites is the “Wheels On The Bus”, which as you know go round and round and round and round and… Well, I can’t help think that the song is relevant to decision making within the U.S. pension industry. We continuously live through multiple cycles running concurrently as if they are just wheels on the bus going round.

I recently presented to attendees at the IFEBP conference in San Diego. My topic was “Modern Asset Allocation”, and my thesis was that doing the same old, same old, was just NOT going to cut it anymore! We need to finally stop that bus. (Please reach out to me if you are interested in getting my presentation and notes). Managing to the return on asset assumption (for public and multiemployer plans) has led to the habitual underfunding of the pension plans through lower contributions, while also leading to more aggressive risk profiles than necessary as asset allocations are stretched to achieve more aggressive return targets. You would think that having suffered through two significant market declines in the last 18 years that consultants and plan sponsors would want to get off the asset allocation rollercoaster.

Well, according to database provider Wilshire Trust Universe Comparison Survey (TUCS), few have learned their lesson, as public pension systems continue to either increase equity exposure or they’re letting their gains just ride. According to Wilshire, equity and equity-like alternative weights are now at pre-2007 levels as median exposures for domestic equities sit at 47.3%, while private equity averages roughly 5.6%. In addition, traditional fixed income, the only asset class that correlates to a pension’s liabilities, has been significantly reduced and the composition of the bond portfolio has changed dramatically with the additions of high yield and private debt, potentially injecting more risk into the equation.

I certainly don’t know when the next recession might occur, but it will. Do we really want to have these plans sitting with their highest equity exposure when it hits the fan? Shouldn’t we be looking for ways to reduce risk after a long cycle of outperformance? Contribution expense as a percentage of salary has been growing leaps and bounds. In a recent article in Cal Matters, pension costs were highlighted. Specifically, the Stanislaus Consolidated Fire Protection District was highlighted. It seems that pension costs are about to bankrupt this entity because CalPERS has levied an additional annual required contribution to cover the UAL.

Even with the extra CalPERS charge in 2015-16, Stanislaus Consolidated’s retirement costs were not overwhelming, about 32% of wages and salaries for the district’s employees. But the UAL squeeze was about to get tighter. It jumped to $397,981 the next year and $517,834 in 2017-18. The agency’s 2019-20 budget sets aside $842,404 for UAL, contributing to a financial freefall. This rapid increase has caused layoffs of staff and the closing of a firehouse. Residents are obviously not pleased to see their taxes go up at the same time that services are diminishing.

But, let’s just keep swinging for the fences, and maybe, just maybe, we’ll get lucky this time. I don’t know about you, but I wouldn’t want to have to rely on luck to make sure that the promised benefits would be paid. It may not be time to get off the bus, but let’s encourage the driver to take a different route this time.

2 thoughts on “Here we Go Again?

  1. So, you agree with Central States having only 12% in stocks and the rest in bond funds and fixed assets? Instead of swinging for the fences, I guess they are standing at the plate watching called strikes until 2025. Oh, that’s right, the so-called nonbailout BLA will solve all.

  2. Good morning, Tom. Always great to hear from you. As you know, there have always been three funds, including CS, that were going to need additional support from the PBGC in order to meet the promised benefits. The other plans needing to take a loan would be able to meet the loan and interest payments, plus future benefits at a 6.5% ROA. We could do nothing and let all these plans fail or try something to save the retirements for the participants.

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