We have a tendency in our industry to get hyper focused on products and concepts that at the end of the day contribute little to the success of pension plans. As an example, one can’t pick up a pension-related magazine without reading about ESG or divestment, whether that is for firearms, fossil fuels, etc. These are just the current fads in our industry, as there are many examples of activities stretching far back into our past. I entered the business in 1981 shortly before pension systems were being asked to become South African free. A noble cause without question, but did it add value to the plan? Did it help secure the promised benefits? As Fiduciaries, that should be the only thing that matters.
Furthermore, we constantly read about minor asset allocation decisions, as if they are going to deliver amazing results. For instance, we may read how one pension system is shifting 2% from this asset class to that one, or another pension system has decided to add exposure to a new asset class at 3-5%, or another one is exiting an asset class that had a small allocation. At the end of the day these activities are nothing more than the shifting of deck chairs on the Titanic. They will add incrementally at best, and worse, take precious time from trustees, actuaries, and asset consultants whose time could have been used on more meaningful activities that would have actually had far greater impact on the overall success of their plans.
For years Ron Ryan and I have been running around the country encouraging plan sponsors and their consultants to develop a new approach to asset allocation that calls for the bifurcation of the assets to meet different pension objectives: 1) secure the benefits, and 2) maximize the efficiency of the asset allocation. We have recommended that plans convert their current fixed income with all of its interest rate risk into a cash flow driven approach that specifically meets that plan’s Retired Lives liabilities. Furthermore, we suggested that the remaining assets could be managed more aggressively in order to meet the remaining Retired Lives liability and all future active liabilities now that the near-term benefit payments have been defeased.
We’ve described this process as a “sleep-at-night” strategy for the plan sponsor who no longer has to worry about such annoying things such as liquidity, interest rate risk, next month’s benefit payments or for that matter the next 10-year’s benefit payments, and/or significant market declines, as the investing horizon will have been extended by 10 years, and we know that over most 10-year periods (>80%) of time equities outperform bonds. How nice would it be to inform your plan participants that no matter what is transpiring in the markets today or any day during the next 10-years, that your benefits are absolutely secured for the next 10 years? How comforting that must be.
Corporate America has engaged in de-risking activities for years, but they have been inspired to reduce risk for the expressed purpose, in many cases, to terminate their pension plans. They have also been incentivized because of more rigorous accounting standards imposed on them through FASB. Both public and multiemployer plans have been slow to adopt de-risking approaches as they continue to believe that managing a pension system is all about achieving the return on asset assumption (ROA). In fact, instead of de-risking many plans have injected more risk into their asset allocation as they’ve pursued more private and alternative investments that come with their own set of liquidity challenges. Need cash in the near-term because you don’t want to sell into this market correction? well, you aren’t getting it from the private/alternative program.
I admire pension trustees who spend endless hours in meetings around the country attending various conferences, such as IFEBP, FRA’s Made In America, Opal’s public fund forums, state specific programs such as FPPTA, TexPERS, IPPFA, and 100s of other well-intentioned gatherings. But, the information that is shared should become the basis for asking questions and challenging the status quo. Unfortunately, we as an industry have done the same things for years despite the fact that many pension plans have been shuttered during the last 40+ years. Isn’t it about time that real change was enacted so that our plan sponsors could actually approach their participants with the great news that all is well – your benefits are secure!