Real Progress – But Hidden from View

I penned a post in July 2017 lamenting the fact that asset consultant performance reviews failed in nearly all cases to highlight the most important comparison a pension plan sponsor needs to see on a regular basis. I am speaking specifically about a comparison of a plan’s assets to their specific liabilities. We have witnessed real progress among DB plans of all varieties during the 12-months ending June 30, 2021. But in many cases, you wouldn’t know that was true. Why? In most examples, only a comparison of a plan’s assets to their total fund benchmark is reported. For instance, we recently read about a Midwest public pension system that had generated a 24+% gain for their total fund during the previous 1-year period only to have that performance looked upon poorly because their total fund asset focused benchmark had produced a 26+% gain. Silly!

The only comparison that matters is how the plan’s asset base is performing versus the promise that was made to their employees. At the end of the day assets need to pay the promised benefits. If there are enough assets to meet that obligation – great. It doesn’t matter one bit whether that plan ever beat their total fund asset bogey.

This reporting also raises another issue. If liabilities are to be highlighted, then how should they be measured? Well, in public fund land, GASB allows for the discount rate on liabilities to be the ROA. In the case of the Midwest plan cited their ROA is 6.75% (I applaud them for having a more realistic objective), but we know that liabilities are bond-like in nature and don’t grow at a constant rate. Given the gyrations in US interest rates during the last 18 months, it shouldn’t be surprising to anyone that liability growth, measured by a market-based rate (FAS AA corp.), would actually produce a negative growth rate for pension liabilities.

So, how does the 24% 12-month performance look versus a liability growth rate that is negative. I’d say that it was pretty outstanding. Does it really matter that their hybrid index benchmark produced a 26% return? Absolutely not! Remember, important decisions are constantly being made by pension trustees related to benefits, COLAs, contributions, asset allocation, etc. It behooves us as an industry to ensure that plan trustees are making these decisions based on the right metrics with the most important comparison being how assets are performing relative to a plan’s specific liabilities.

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