By: Russ Kamp, Managing Director, Ryan ALM, Inc.

It has been a very, very long time since I was in high school, and as a result, things may be different today.  But what I remember about my high school days and the dances at Palisades Park (NJ) Jr. Sr. High School, were that the boys stood on one side of the gym and the girls stood on the other.  Occasionally a couple of girls would dance, but there was little fraternizing among the boys and girls.

Well, I get the same sense about the management of DB pension plans today, as I did at those dances a very long time ago.  It seems to me that we have on one side of the “gym” assets and on the other side is liabilities, and hardly, if ever, the twain shall meet.  As a result, DB plans haven’t found their rhythm and there is no dancing!

Sure, we get periodic updates from a number of industry sources highlighting how the funded status is improving or deteriorating, with the latest for me occurring at the NCPERS conference in Boston during the last couple of days.  But we don’t seem to get a lot of direction on how we should mitigate the volatility in the funding of these extremely important retirement vehicles except to contribute more or pay out less.  I can say with certainty that striving to achieve the ROA isn’t the solution that will eliminate the volatility.  That’s been tried, and DB plans continue to see extreme volatility in their funded ratios mostly based on what’s transpiring in the equity markets.

For far too long, the asset side of the pension equation has dominated everyone’s focus, and as a result, a plan’s specific liabilities are usually only discussed when the latest actuarial report is presented, which is often on a one or two-year cycle.  This isn’t nearly frequent enough. We suggest that the primary objective for the assets should be the plan’s liabilities, and that every performance review should start off with this comparison.  However, in order to get an accurate accounting of the liabilities one needs to measure and monitor them on a regular basis. This activity requires a Custom Liability Index (CLI). No generic fixed income index can adequately represent a pension plan’s unique liabilities, although that is the course of action that most plans have pursued.

In order to preserve critically important DB plans we need the plan’s assets and liabilities dancing as one. Without this, DB plans continue to face a very uncertain future. Are you ready to bring both parties to the dance floor? Don’t be shy!