News For the ROA Chasers

A pension system’s primary objective should be to secure the promised benefits at low cost and prudent risk. Seems obvious, but regrettably that objective has NOT been the primary focus for most public and multiemployer plans for decades now. We can debate the reasons why when the dust settles, but that isn’t going to help us right now.

Unfortunately, the focus for most asset consultants, actuaries, and plan sponsors has been return. As a result, we’ve insured that the funded status and contribution expenses have become incredibly volatile. Instead of securing the promise and winning the game, we’ve decided to play Russian roulette. How has that worked out? Again, it shouldn’t be surprising, but that pursuit of the ROA has failed to stabilize anything pension-related. Many state budgets are being strained, as contributions become a bigger share of annual state budgets and more than 125 multiemployer plans (likely more after this market crash) face insolvency within the next 15 years.

We’ve written a few posts in the last 6 months or so highlighting our concern that equity and equity-like allocations within pension systems for public and multiemployer plans were at levels that were greater than that which we’d witnessed prior to 2007. The excuse was that bond yields were so low that they couldn’t justify having them in their portfolio because they wouldn’t achieve the ROA objective. How’s that worked out? For the record, the S&P 500 through March 31, 2020 has achieved a 4.8% return for 20 years! Meanwhile, the Bloomberg Barclays Aggregate (it will always remain the Lehman Agg. to me) index is up 5.1% during that same 20-year period. Wow, bonds have actually outperformed equities by 0.3% per year for 20-years!

Furthermore, we’ve recently reported that the private equity markets are likely to see massive write-downs of their portfolio companies (33%-50%), as our economy has been shuttered. I have recently seen the results of a business survey conduced in Northern NJ that indicated that 45% of small businesses would not survive three more weeks and that 83% of businesses would be forced to close down if this situation were to extend to the end of June. Think about those jobs and wages lost and the impact on demand for goods and services.

The move to less liquid investments -private equity and debt, real estate, infrastructure, etc. – is also exacerbating the poor performance of pension funds that are forced to sell assets into this weakness in order to make benefit payments. As you know, it didn’t have to be this way. Are we finally going to get off this asset allocation roller coaster that I wrote about earlier this week? Defined contribution plans are NOT retirement vehicles, but if we don’t do a better job of managing DB plans, they will be the only game in town. Our plan participants, retirees, and the US economy will suffer the consequences.

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