We’ve written from time to time about individual pension plans whose unique situation has surprised us. Here is another example of a plan and the current asset allocation that just floored us! Here are the details: Closed plan, 150% funded based on the ROA and 95% funded using ASC 715, no more contributions, benefits can’t be enhanced, and the sponsor(s) can’t recapture any of the surplus. Given these characteristics one would assume that the asset allocation would be incredibly liability focused. Yet, that couldn’t be further from the truth. This plan is invested in 70% equity and equity-like product! This situation is outrageous.

Again, there is NO upside for anyone – neither the participant nor the plan sponsor. There is only downside risk, especially as equity market valuations and the underlying fundamentals seem extraordinarily stretched. In this particular case we were approached by the plan’s actuarial firm because they, too, recognized the incredible risk being taken in the management of these assets. Since this plan has won the battle… they have the potential to SECURE all of the promised benefits with little to no risk by cash flow matching assets to the liability cash flows. Should the equity markets fall, they have no way of recouping those losses because the fund no longer receives any contributions. They’d have to wait for the markets to recover the losses, but would they have the time? Remember a 25% equity correction requires a 33.3% recovery and a 50% correction requires a 100% recovery.

Through our analysis we are able to show that ALL of the benefits can be secured through cash flow matching. In fact:      

 • We can secure the benefits at a $6.2mm or 28.68% funding cost savings

• Leave a $4.8 mm surplus or 20%

• Reduce management fees by $100,000 per year or 50 bps.

This is one of those “no-brainer” moments that has one just shaking their head. How could this situation exist? Are we so focused as an industry on the return on asset assumption (ROA) that we’ve forgotten pension basics? Remember, the primary objective in managing a pension plan is to SECURE the promised benefits. Everything else is a distant second. I’m not sure how this situation will unfold. I hope that we will be given an opportunity to help this plan secure those promised benefits. Unfortunately, this situation is not unique, especially among smaller DB plans. As fiduciaries we have a responsibility to do what is best for the plan and the participants. Can anyone say that is true in this case?