By: Russ Kamp, CEO, Ryan ALM, Inc.

I can remember as a child playing the games hide-and-seek and manhunt among myriad activities with my friends in Palisades Park. We would play for hours. It was particularly exciting as daylight waned just before we were beckoned home when the streetlights flicked on.

Those games were innocent and most of the time no one got hurt. However, Ron Ryan, Ryan ALM’s Chairman, has written about another game. In this competition, he’s challenging pension professionals to “find the liabilities”. Why? Unfortunately, most of the effort put forth by pension professionals (outside of actuaries) is focused on assets: the allocation, manager selection, and performance. But is that the correct approach? Of course not.

The only reason that a pension plan exists is because of a promise that has been made to the plan participant. Pre-funding that promise through a pension system is a most effective approach to meeting those future obligations. As a result, that promise needs to be the focal point of pension management, but it rarely is. Unfortunately, most folks think that managing a pension is all about returns. How has the fund performed relative to the return on asset (ROA) assumption.

As Ron points out in this excellent piece, if all the investment managers/strategies outperform their generic asset specific benchmarks, but the total fund underperforms its liability growth rate, has the fund won? Of course not. That’s why we believe that the primary objective in managing a DB pension plan should be to SECURE the promises at a reasonable cost and with prudent risk.

As I mentioned earlier, the games that I engaged in as a child in New Jersey were innocent. Failure to understand what a plan’s liabilities look like could be much more harmful. We’ve seen that scenario play out many times and with significant consequences. Don’t let your fund become the victim of an assets-only approach.