Roughly at this time every year, we start to get the reporting of fiscal year pension returns for the various state and municipal public plans, and every year we get the same mixed message. I happened to catch a glimpse today of a recent report that had a mid-Atlantic fund up 3.6% for the 12-months ending June 30, 2020. Interestingly, the sub-title of the article was “Fund beats its benchmark to raise its asset value to $54.8 billion.” Well, isn’t that just grand that the fund beat the total fund asset benchmark by 0.44%!

Further down in the article it was mentioned that the fund’s return on asset objective is actually 7.4%. Based on this comparison, the plan trailed their yearly objective by 3.8%. As everyone knows, these plans must make up in contributions what the plan fails to generate in return. However, it gets worse: in highlighting the performance of the various asset classes, it was noted that the fund’s “rate-sensitive investments” were up 18.1% during the year, while cash was the second-best performer at just over 5%.

“Rate sensitive investments” is another way of saying bonds. What the article didn’t discuss was that plan’s liabilities, which are bond-like, as they move with changes in interest rates just like bonds, would have been up at least 18% as liabilities grew substantially with the massive decline in long-term interest rates. So, not only didn’t the fund meet its ROA objective, the asset side of the equation dramatically underperformed plan liabilities. Although assets may have grown to $54.8 billion, the plan’s funded status would have declined significantly.

Being a plan sponsor is a very difficult task, especially in this environment where state and local budgets are being negatively impacted by Covid-19 events and the likelihood of catch-up contributions being nothing more than a pipe dream. Masking the true nature of the funding problem only exacerbates this difficulty, as decisions are often made based on incomplete data.