This is the Impact of Riding the Asset Allocation Rollercoaster

I am happy to report that today’s post is the 1,000 produced on this blog. I’ve tried to cover many different aspects of pension management. My blogs are intended to help, encourage, urge, foster, persuade, promote, advance, and even implore change in how Pension America approaches the critically important task of protecting and preserving defined benefit pensions for the masses. Have I been successful? You tell me, but I’m not prepared to stop! There is much more work ahead of us.

For those of you who have followed this blog for some time, you will remember that I’ve used a rollercoaster to symbolize pension asset allocation. We tend to ride markets up and markets down with little regard for the long-term impact of how these moves actually impact the pension systems. I’m frequently told that markets always recover, and the last 12+ years are used as an example. Yes, markets recovered substantially from the depths of the two extraordinary corrections witnessed during the ’00s. But, often hidden from view is the impact that those significant drawdowns had on pension contributions. That growth has been mindboggling. Remember that any increase in contribution costs is NOT repaid when pension plans recover.

You might ask: How have contributions grown in an environment in which returns have been so spectacular? It is a fair question. Let’s review the pension funding formula: B+E = C+I where B+E are benefits and expenses, while C+I are contributions and investment earnings. Most pension systems were fully funded after 1999 and contribution expenses were modest and controlled. However, during the two major corrections of the ’00s, contributions (C) had to make up for the devastating impact of a very negative period for investment earnings (I). I present the following information as a representation of the brutality of this period on pension contributions. The data highlighted is for a large public fund plan in a major metropolitan area. This history is from their latest actuarial report.

Statutory
Fiscal YearsFunded RatioContribution paid% of Payroll
6/30/00146% $               68,619,745.000.90%
6/30/01143% $             100,024,692.001.30%
6/30/02135% $             105,660,069.001.20%
6/30/03124% $             107,992,496.001.20%
6/30/04114% $             310,589,074.003.50%
6/30/05109% $             822,763,025.008.90%
6/30/06101% $          1,024,358,175.0011.10%
6/30/0797% $          1,471,029,609.0015.50%
6/30/0897% $          1,874,242,487.0019.00%
6/30/0996% $          2,150,438,042.0020.60%
6/30/1075% $          2,197,717,073.0020.00%
6/30/1176% $          2,387,215,772.0020.80%
6/30/1276% $          3,017,004,318.0025.50%
6/30/1368% $          3,046,845,264.0025.50%
6/30/1468% $          3,114,068,148.0025.60%
6/30/1570% $          3,160,257,868.0025.60%
6/30/1671% $          3,365,454,212.0027.30%
6/30/1772% $          3,328,192,582.0026.50%
6/30/1876% $          3,377,024,173.0026.30%
6/30/1968% $          3,694,364,590.0026.70%
6/30/2074% $          3,726,701,492.0026.30%

Despite wonderful markets, contribution expenses for this fund have increased by 54.8 TIMES!! Not 54.8%. These additional contributions were required due to the I in the equation above producing significant negative experiences. When that occurs, the C has to make up the shortfall. The important fact is that these enhanced contributions are never returned to the employer. Instead of taking risks off the table and winning the game when this plan was dramatically overfunded on 06/30/00, they let the assets ride! The result has been devastating. If you think that this plan’s experience is unique, please think again. Most public pension systems were overfunded in 1999. A significant majority (most) are not today, and their contribution expenses have skyrocketed.

As we neared the end of 2021, we once again witnessed improved funding that was being hailed throughout our industry, but instead of doing anything to protect that improved funding, we elected to let the “good times roll”. How has that worked out since the beginning of 2022? Will this period of market destabilization once again lead to significant growth in contributions? For how much longer will these plans be able to convince their taxpayers (providers of C) that these plans should continue to be supported? Isn’t it time for a rethink?

7 thoughts on “This is the Impact of Riding the Asset Allocation Rollercoaster

  1. Congrats on 1000 blog posts Russ. WOW!!

    • Thank you, Ron. You continue to be a bright light in our business illumintaing important DC issues, especially as they relate to target date funds – please don’t stop! Russ

  2. Thanks, Ron. I will continue to do my best to support your efforts! Keep firing!

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