Yeah, I Think That We Have!

On January 29, 2020, I penned a post on this blog asking the question “have we outsmarted ourselves?” Well, I don’t think that there is any question that we, as an industry, have, and it is crushing the very funds that we were tasked with trying to help. The whole idea that managing a pension has morphed into a return seeking game is the biggest problem of all. DB pension plans should have focused on the promised benefits (plan liabilities) and NOT the return on asset assumption, which isn’t a calculated number in the first place and achieving that number doesn’t guarantee a successful outcome.

Had these plans remembered that the only thing that matters is securing the promised benefits at low cost and appropriate risk, we wouldn’t be once again subjecting the plan’s assets to the proverbial asset allocation roller-coaster and plan participants to an uncertain retirement future. P&I recently published an article that highlighted the boring nature of Idaho’s (PERS) 70/30 asset allocation, which doesn’t seem so boring, but rather aggressive. However, according to a leading consultant quoted in the article, “we’ve seen public pension funds tiptoe away from 60/40” and “if anything, it’s now 80/20, an even greater reliance on return-seeking assets.” Oh, my!

Where is the reference to plan liabilities or funded status driving asset allocation? Why does it make sense that asset allocation is driven by the ROA? If two plans have 7.25% as their ROA, should they have the same asset allocation even if one plan is 60% funded and the other is 90%? Of course they shouldn’t, but in our industry more times than not they do.

How has that move into more equity-like product paid off? It shocks me to think that a majority of plans had greater equity exposure at the start of this year than they had in 2007. When will we learn? A pension plan should always be on a glide path to full funding, whether they are 50% funded or 90%. A single asset allocation geared to the ROA is what is wrong. Pension plans should utilize a bifurcated approach to managing their assets. A cash flow matching bond portfolio should be used to defease the first 10 years of the Retired Lives liability. This will improve liquidity, eliminate interest rate risk, secure benefits, and extend the investing horizon for the remainder of the assets that now have time to capture the liquidity premium. The balance of the assets can be managed more aggressively as they are no longer a source of liquidity. Their goal and objective is to outperform future liabilities.

According to the same article, public pension systems have roughly 21% in fixed income. It is a very good time to shorten both maturity and duration to take advantage of the historic move in US rates. Bonds with maturities greater than 10-years should be used to build the cash flow matching program. As rates find a more normal level, liability growth will likely be negative allowing for a potentially rapid recovery in funded status.

10 thoughts on “Yeah, I Think That We Have!

  1. BLA would sure have been off to a bad start if it had been implemented in Jan or Feb 2020 as many had hoped! Hindsight is 20-15, Russ. It would have been analogous the UPS 6.1 billion withdrawl liability that was put into Central States Pension in Dec. 2007. “Timing is everything” is a saying. I don’t know if it is everything, but in this case, I believe the time for leveraging will come soon, perhaps within this month.—then BLA? or a different leveraging technique?

    • Hi Tom – I believe that the timing would have been perfect. Please remember that the loan proceeds would have been invested in bonds to defease the Retired Lives liability. The plan sponsor would not have been able to invest the money in a traditional asset allocation. Hade that been the case then I would agree with your point. It would have been wonderful to secure the reitred lives liability in January so that assets and liabilities moved in lockstep. Unfortunately, with rates and equities falling, pension systems have gotten crushed!

      • Russ, Central States Pension has moved to 100% fixed assets (0% in equities). So you think that the 6.5% annualized returns for 30 years required for the BLA to work can be made by bonds?

  2. Absolutely, not! But, please remember that CST, the Miners, and Bakers were the 3 plans that needed additional PBGC support to “survive”. My comments are exclusive of those entities. The Miners have been taken care of at this point so only CST and the Bakers need the extra boost.

  3. Russ, in an analysis released in Sept 2019, the CBO found that about 25% of the pension plans that would receive 30-year loans under the BLA would not be able to pay them back and would still run out of money. And most of the plans that did repay their loans would become insolvent anyway.

  4. I’ve seen that conclusion, but not the numbers that they used to determine that outcome. Given that the cost of the BLA loans would be so low right now, I remain confident that they would be paid back. That said, what is wrong with renegotiating loan terms 30-years out if that is necessary. It happens in business all the time. I’d rather see benefits paid for 30 years than people thrust onto the social safety net because their pension has been slashed.

  5. I’ve seen that conclusion, but not the numbers that they used to determine that outcome. Given that the cost of the BLA loans would be so low right now, I remain confident that they would be paid back. That said, what is wrong with renegotiating loan terms 30-years out if that is necessary? It happens in business all the time. I’d rather see benefits paid for 30 years than people thrust onto the social safety net because their pension has been slashed.

  6. “Sept 2019, the CBO found that about 25% of the pension plans that would receive 30-year loans under the BLA would not be able to pay them back and would still run out of money” This has been brought to your attention before Russ and you sidestepped it as you continue to do now.. You now say you have not “seen the numbers that they used to determine that outcome”. .Did you go look or make any attempt at all to verify. You just keep repeating the Cherion said this two years ago speech and the Gene M. Kalwarski is a god speech. The same Gene M. Kalwarski who is an NCCMP rat and was on the team that created MPRA. The same Cheiron who makes millions from Union funds and has its company head firmly implanted in the NCCMP/Union ass.I would not trust them with a dogs supper. I am sure Cheiron would not spew BS for the Union dollar. Tell us .Was Cherion asked to provide the numbers that they used to reach their conclusions by Grassley or anybody else and refused saying they could not because it was work product paid for by a client??

    It seems the only people who give a darn what Cherion has to say is those promoting the IBT/ Hoffa Act agenda.Well maybe Segal who is still trying to figure out why Unions are dumping them in favor of Cheiron.What is fact is either the CBO or Cherion are lying. So without seeing the information and numbers the CBO used to reach their conclusions are you claiming for the record the CBO is lying about the 25% and the BLA being worthless? How about we see the numbers Cherion used to reach the conclusions you keep repeating while acting as if there is not a serious discrepancy?

    The most amusing part of your replies to Mr Dolyniuk is “The plan sponsor would not have been able to invest the money in a traditional asset allocation” Says who and based on what?? The language in the Hoffa Act. Nonsense. The plan sponsors do not give a crap about the law and routinely violate and ignore existing laws and regulations. Who are you claiming will enforce? The same EBSA and Treasury who have not only failed but refused to enforce existing laws to stop the mismanagement and looting of Union pensions? The same EBSA who warns Union Plan Sponsors of upcoming investigations into their illegal acts with their funds The same Treasury who is holding seminars to see to it Trustees get their application for MPRA cuts approved. The same Treasury who is expediting MPRA cuts in response to lobbying by Union bought and paid for George Miller. The same George Miller who put his name on MPRA .The same GM Strategies who is being paid by the NCCMP and United Assn of Journeymen & Apprentices of the Plumbing & Pipefitting Industry to lobby for the implementation of MPRA and as we have seen Treasury sure is accommodating Georgey and the Union plan sponsors pursuing cuts under MPRA.

    Yet you claim that same Treasury who has failed in its enforcement duties to date and is pandering to Union paid for ex political hacks will suddenly like magic enforce the language in the BLA.Is this how you make the claim “The plan sponsor would not have been able to invest the money in a traditional asset allocation” Russ you are clearly not this naive and it is rather insulting you think we are.

    • Good morning, Richard. The terms of the loan require that plan sponsors defease the Retired Lives Liability through one of three strategies – annuity, LDI, or CDI. There will be a monitor at the PRA to ensure that this process is followed. This is NOT left up to the discretion of the plan sponsor or their advisors.

    • Richard – It would be wonderful if you shared with everyone your strategy to protect and preserve these plans.

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