Now is not the time to put one’s head in the sand. There are incredible opportunities to be captured. For one, public pension systems looking to close some of their funding gap should take advantage of the lower valuations in equities and the incredibly supportive interest rate environment to issue a pension obligation bond (POB). Historically, many POBs have failed to improve funding because the timing on the bond was wrong and the execution was flawed.
Don’t take the proceeds from your bond and put it in a traditional asset allocation. Take the proceeds from your POB and defease as much of the Retired Lives Liability as possible. The current assets should then be managed more aggressively, as they now have a longer time horizon and no call on them for liquidity purposes. Given the extremely low yields on US debt, bonds will likely not return much for the next 5-10-years. As a result, you will want to use bonds for their cash flow and known terminal value to fund promised benefits. With the significant decline in equity prices, you have a wonderful opportunity to buy lower than just 2-3 weeks ago when equities were at record levels.
Again, DB pension systems have been hurt by recent market events, but sitting on the sidelines is not the right game plan. It is time to take advantage of those opportunities that exist, while positioning your plan for greater success in the future. Call us; we can help you navigate these rough waters.