Asset consultants continue to play a vital role in the management of defined benefit plans. Occasionally, a plan has to conduct a search for a new one based on several reasons. An industry colleague recently asked me what questions they should ask during their search process for a new asset consultant. I appreciated getting asked that question and I took some time to think about the questions that I’d ask if given the opportunity.

I believe that consultants will tell you that their primary functions are related to asset allocation and manager selection. I know that they do much more than just that, but I think that these areas are where they feel that they add the most value. Given these areas of focus, here are the questions that I would pose:

• What is the true objective of a DB plan?
• How is that reflected in the asset allocation?
• How do you calculate the ROA?
• Is asset allocation based on the funded status or the ROA?
• Should a plan with a 60% funded status have a different asset allocation than a plan with a 90% funded status even if they have the same ROA objective?
• What is the role of bonds within a DB plan?
• How do you de-risk a pension plan within your asset allocation strategy?
• How do you fund benefit payments?
• What are you doing differently today than 5 to 10-years ago? 
• What did you do differently after the GFC?
• How do you define risk in asset allocation?
• If risk is defined as the uncertainty of funding benefits. What is the strategy that you employ to meet this objective?
• What benchmark do you use for asset/liability management? 
• What is highlighted on the first page of your quarterly performance report? If it isn’t assets versus liabilities what it it?
• How do contributions play a role in asset allocation?
• What are your definitions of alpha and beta within a DB pension plan?
• When do you change an asset allocation?
• Do you have an inflation hedge strategy? If so, what are you hedging – asset inflation or pension inflation?
• How does your shortlist of managers do 3 years after a search is completed relative to the broad universe of managers? Do you monitor this and how often?

As you see, my questions are much more focused on asset allocation and importantly through a liability lens, which is often missing in a traditional asset consultant relationship. Unfortunately, our industry has the tendency to do the same old, same old. Clearly, defined benefit plans have come under great stress in recent decades. Doing the same old, same old has failed.  Isn’t it about time that we try something new? But, in actuality, paying greater attention to plan liabilities would bring us back to the early days of managing DB pension plans when a plan’s liabilities were the main focus and those obligations were defeased.

Why did we get away from securing the promised benefits by focusing more attention to the return on asset assumption (ROA)? By doing so, we have added greater uncertainty and more risk.  DB plans need to be secured, but for them to be successful, we need to significantly reduce funding volatility. Are you comfortable that the average DB plan has greater equity exposure at this time than they had before the Great Financial Crisis?  I’m not.