If You Don’t Like The Outcome, Switch The Objective.

I don’t like that public pension systems use the return on assets objective (ROA) to value their liabilities, but it is the accounting rules under GASB that dictate that requirement. I also don’t like that public pension systems continue to have such lofty ROA targets (7.22% based on a NASRA 2/20 brief). The higher the ROA target the lower the annual contributions required to fund the plan. For those plans that have failed to achieve the ROA, the combination of weaker performance and smaller than necessary contributions is an unaffordable double whammy that destroys the funded status of these plans longer-term.

If that isn’t bad enough, I was reading an investment annual report for 2019 for a large state plan (yes, I have a thrilling life) that showed performance for the fiscal year 2019 (June 30th fiscal year-end), and for 3-, 5-, 10-, and 20-year time frames ending June 30, 2019. The performance comparison was for the total fund versus the total fund benchmark (benchmark is a weighted composite of index returns in each asset class). The 2019 and 3- and 5-year comparisons were below that benchmark, while the 10- and 20-year performance revealed above benchmark returns. So what!

In the case of the 20-year period, the pension plan in question had generated only a 5.7% return while the total fund benchmark was up 5.3%. Does it really matter that this plan topped it’s total fund objective by 40 basis points when it failed to achieve the ROA by 1.8% per year for 20 years? Remember that annual contributions are determined based on the assumption that the ROA will be achieved. The fact that this system underperformed so badly should be the story. Let’s stop coming up with new ways to measure “success” when really the only thing that matters is if the plan can secure the promised benefits or at the very least, achieve the ROA. Oh, the games people play.

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