Did We Learn Nothing?

The Great Financial Crisis of 2007-2009 highlighted the need for liquidity in pension plans. The lack of liquidity that was witnessed as the result of moving significant assets into private market investments spawned the growth of the secondary markets, while driving asset prices lower as liquidity was forced where natural liquidity didn’t exist. Well, it doesn’t appear as if our industry learned much, if anything, from that crisis. As we’ve reported on several occasions, pension plan allocations to equities and equity-like products are at levels greater than where they were in 2007, alternative investment allocations are up, and guess what, liquidity is once again a challenge. Did we not learn anything?

I spoke before about 600 trustees (2 sessions) at the IFEBP in San Diego in October 2019. My topic was enhanced asset allocation strategies. As an aside, I’ve spoken on that subject at more than one dozen conferences in the last couple of years. I asked the members of the audience how many had been trustees when the GFC took place. I was pleased to see that well more than 50% of the audience had been long-tenured trustees. I also asked them if they remembered what they were thinking about in 2006 and early 2007 as it related to their pension systems. Were they thinking that a stock market crash was around the corner? More importantly, what are you thinking about now (10/19)? I challenged them to start thinking very hard because the bull market at that time was 10+ years old and we don’t know when or why a sell-off will occur, but it will happen – it always does.

I suspect that little was done to protect pension plans from seeing their funded status crushed during this recent crisis. I read with interest this morning an article in Chief Investment Officer magazine by Michael Katz titled, “It’s a Terrible Time for Pensions to Have Weak Liquidity” followed by “Market downturn could force some public pensions to sell assets for a loss.” Here we go again. Did we not learn anything?

The article went on to say that according to S&P, US public pension plans have an average of 1% of their portfolio assets held in cash and short-term investments to pay ongoing expenses, such as benefit payments and administrative costs. Well, that just isn’t good enough. Again, my feeling is that Pension America has been misdirected in focusing on return instead of the primary objective of securing the promised benefits.

Had pension plans adopted the cash flow driven investing (CDI) approach that Ron and I have spoken about for years, there would be no issue today. They would have the cash on hand to meet expenses, no interest rate risk, a longer investing horizon for the alpha assets, and no forced liquidity that would exacerbate the poor performance of their plan. Will this time be different? Will they actually adopt a new strategy or will we once again be discussing this liquidity issue in 2025?

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