Now is not the time to put one’s head in the sand. There are incredible opportunities to be captured. For one, public pension systems looking to close some of their funding gap should take advantage of the lower valuations in equities and the incredibly supportive interest rate environment to issue a pension obligation bond (POB). Historically, many POBs have failed to improve funding because the timing on the bond was wrong and the execution was flawed.

Don’t take the proceeds from your bond and put it in a traditional asset allocation. Take the proceeds from your POB and defease as much of the Retired Lives Liability as possible. The current assets should then be managed more aggressively, as they now have a longer time horizon and no call on them for liquidity purposes. Given the extremely low yields on US debt, bonds will likely not return much for the next 5-10-years. As a result, you will want to use bonds for their cash flow and known terminal value to fund promised benefits. With the significant decline in equity prices, you have a wonderful opportunity to buy lower than just 2-3 weeks ago when equities were at record levels.

Again, DB pension systems have been hurt by recent market events, but sitting on the sidelines is not the right game plan. It is time to take advantage of those opportunities that exist, while positioning your plan for greater success in the future. Call us; we can help you navigate these rough waters.

On February 26, I wrote that given the market action in US government bonds that it might be the prudent time to sell anything 10-years and out. At that time the 10-year Treasury had a yield of 1.33%, while the 30-year Treasury bond was yielding 1.82%. Nine days later and the 10- and 30-year are yielding 0.71% and 1.26%, respectively (as of 9:35 am). Incredible, yes, but it provides plan sponsors with a unique opportunity. There have been tremendous gains from your active fixed-income portfolios. Even if rates fall from these levels, the overall return will be muted. Now is the time to rotate active fixed-income into a cash flow matching strategy that defeases your plan’s Retired Lives liability. We’d recommend cash flow matching the next 10-years liabilities chronologically. Use bonds for their income and known terminal value to secure the promised benefits.

In periods of uncertainly there is opportunity. This may prove to be the trade of the century!

According to a recent P&I article, three different reports on the funded status of Corporate DB plans highlighted the fact of what we at Ryan ALM have been stating, February was ugly, and this for a universe of pension plans that in many cases have taken steps to de-risk. Studies by Wilshire, Northern Trust, and Mercer each indicated that falling asset levels and rising liabilities combined to reduce funded ratios by anywhere from 5% (Mercer) to 3.9% (Wilshire) within the month. The aggregate funding for Corporate DB plans is somewhere between Mercer’s 79% to Northern Trust’s 81.3%.

The start to 2020 is the worst beginning of a calendar year for corporate funded ratios dating back to January 2013 when Wilshire began reporting on the funded status of corporate DB plans. Mercer estimated that the significant decline in funded ratios increased the funding deficit for the S&P 1,500 companies by $125 billion, bringing the total deficit to $527 billion.

As we reported yesterday, multiemployer and public pension systems that have been slow to develop de-risking strategies will have seen as much as a 17% shortfall in their funded status, according to the Ryan ALM pension monitor. Pension systems should not be subjected to the whims of the market as they have been. This volatility in funded status manifests in escalating contribution expenses.

The start to 2020 has been nothing short of UGLY for pension America. A generic asset allocation produced a -4.93% return for the first two months (2/29/20) while Ryan ALM’s liability index was up 12.01% for the same time frame. The nearly 17% underperformance of assets to liabilities is crushing the funded status of all plans that haven’t taken the steps to manage assets versus plan liabilities, which would include most of the multiemployer and public pension systems. These plans, in many cases, are already on life-support. When will a new course be chosen? Plan participants throughout America are counting on all of us to protect the promises that have been made. Doing the same old, same old has failed miserably. The time to act is now before these critically important plans are no longer viable.

I was asked a question by the moderator (a plan sponsor) at the Opal/LATEC conference regarding the reason that DB pension systems are struggling to meet the promised benefits. Obviously, there are many contributors to this problem, but I reminded folks at the conference that the issues all start with the pension accounting rules. This subject was brought to my attention many years ago by Ron Ryan, Ryan ALM, who wrote a wonderful book on the pension crisis in which he highlights the fact that differences in valuing pension liabilities has lead to significant funding differences between corporate plans that are much better funded and all others. I would highly recommend that you spend a little time with this book to truly appreciate Ron’s point of view.

Because of the accounting rules, DB pension systems consistently underfunded their plans while simultaneously injecting more risk into the asset allocation process than was necessary. Today, multiemployer and public DB pension systems have more aggressive asset allocations than they had prior to the GFC. Market action of the last 10 or so days dramatically impacts the funded status of these systems, which may ultimately impact their long-term viability.

Remember H.R. 397? This is the Rehabilitation for Multiemployer Pensions Act of 2019 (aka the Butch Lewis Act). It called for the setting up of a new agency within the U.S. Treasury Department called the Pension Rehabilitation Administration (PRA). It was to provide low-interest rate loans based on the prevailing 30-year U.S. Treasury Bond plus 25 bps. Unfortunately, nothing has happened with the legislation once it got passed by the House (July 2019) and went before the Senate.

As we wrote in a blog post from earlier today, pension plans are getting spanked with the combination of falling rates and equities, but one thing that is working in the favor of the sponsors of eligible Critical and Declining plans is their cost has been nearly cut in half. That’s right, the cost has been nearly cut in half as the current yield on the 30-year U.S. Treasury bond is 1.62% (as of 3:50 pm today), while on April 18, 2018 when we presented to House staff the yield on the same bond was at 3.14%. Being able to fund these struggling plans with the very cheap financing is an unexpected bonus. To think that a plan could get a 30-year lease on life at an interest rate of below 2% (including the 25 bps) is almost too good to believe.

Will our leaders in DC squander this opportunity?

Once again, this aggressive Fed Funds rate cut is hosing those trying to live off a modest savings account. For years our seniors have been forced to take on more and more risk, both in bonds and equities, to try and stretch their savings, as interest income alone won’t support their basic living needs and principal balances are constantly a source of additional spending.

Today’s move by the Federal Reserve may or may not help support U.S. equity markets (it is certainly questionable as I write this note) following last week’s trouncing, but it may also cause market participants to fear that the Coronavirus’s reach may create greater global economic weakness and push those economies into recession. The action within U.S. bond markets is unprecedented, and signals to me that recessionary fears are top of mind.

Let’s also not discount the impact that the recent market action has had on defined benefit pension plans (DB), as funded ratios are getting crushed given the combination of falling equity markets and dramatically plummeting interest rates. Corporate plans are more immediately impacted, as the liability discount rate is a more realistic interest rate (blended AA Corporate), while public and multiemployer plans pretend that rate changes don’t impact their funded status, as they use the return on asset assumption to value their plan’s liabilities. Oh, it must be nice to be an Ostrich!

Given the market action, it is likely that funded ratios have fallen by much more than 10%, further jeopardizing the sustainability of both public and multiemployer plans, especially those currently designated as Critical and Declining. If pension systems had just taken some risk off the table following more than a decade of good markets and improved funding, we wouldn’t be nearly as concerned, but once again we are left wondering why it is that we never seem to learn as an industry.

Furthermore, there were roughly 125 multiemployer pension systems that were designated as in Critical and Declining status prior to the last month. One doesn’t need to be a rocket scientist to appreciate the fact that a significant percentage of those designated as Critical have achieved a new status. Unlike the Jeffersons, they are not moving on up!

We need policies that will protect seniors, plan participants, and the pension plans that they rely on. We witnessed the devastation that was wrought in 2008 on participants and retirees in defined contribution plans and IRAs. Do we really want history to repeat itself or are we finally going to learn from our mistakes?

Perhaps it isn’t surprising to you, but I find the Supreme Court’s decision in the ruling against Intel’s investment policy committee to be somewhat shocking. I fear that this decision will result in unintended consequences that will ultimately harm plan participants to a greater extent.

As a reminder, this 6-year-old case has to do with the difference between receiving retirement plan disclosures and having “actual knowledge” of the information. Why the distinction? According to a P&I article, “there is a six-year limit to file ERISA breach lawsuits if the plaintiff does not have actual knowledge and a three-year limit for those who do. The Intel employee, Christopher Sulyma, a participant in two Intel defined contribution plans, “alleged that plan managers violated their ERISA fiduciary obligations by offering too many alternative investments in the plans’ lineups and that disclosures of investment information were inadequate.”

My concern is that this decision may have an adverse impact on fund line-ups and perhaps even the offering of retirement programs in the first place. How are defined contribution investment committees going to insure that not only do plan participants receive the fund information, but they must now determine that the employee has understood what they read? Will there be a test prior to an investment in alternatives or any asset class/product? Will the QDIA have to be cash? Where is the personal responsibility?

Anyone who knows me, knows that I am a huge fan of professionally managed DB plans. Here’s another reason for any sponsor of a DB plan to perhaps maintain them or if the plan has been frozen/terminated a reason to re-start them at this time, which may be the silver lining within this very dark cloud. This is one time that I must stand with Corporate America. The P&I article indicated that “the opinion delivered by Justice Samuel Alito recognized that the Intel investment committee “may well be correct” that the interpretation substantially diminishes the protection that it provides ERISA fiduciaries, but said that if the current scheme should be altered, “Congress must be the one to do it.”” Well, there’s a comforting thought – oh, boy!

If you thought that January was bad for assets versus liabilities, just wait until you see what happened to funded ratios in February! We will have updated data in the next couple of days, and it won’t be pretty!

We have a tendency in our industry to get hyper focused on products and concepts that at the end of the day contribute little to the success of pension plans. As an example, one can’t pick up a pension-related magazine without reading about ESG or divestment, whether that is for firearms, fossil fuels, etc. These are just the current fads in our industry, as there are many examples of activities stretching far back into our past. I entered the business in 1981 shortly before pension systems were being asked to become South African free. A noble cause without question, but did it add value to the plan? Did it help secure the promised benefits? As Fiduciaries, that should be the only thing that matters.

Furthermore, we constantly read about minor asset allocation decisions, as if they are going to deliver amazing results. For instance, we may read how one pension system is shifting 2% from this asset class to that one, or another pension system has decided to add exposure to a new asset class at 3-5%, or another one is exiting an asset class that had a small allocation. At the end of the day these activities are nothing more than the shifting of deck chairs on the Titanic. They will add incrementally at best, and worse, take precious time from trustees, actuaries, and asset consultants whose time could have been used on more meaningful activities that would have actually had far greater impact on the overall success of their plans.

For years Ron Ryan and I have been running around the country encouraging plan sponsors and their consultants to develop a new approach to asset allocation that calls for the bifurcation of the assets to meet different pension objectives: 1) secure the benefits, and 2) maximize the efficiency of the asset allocation. We have recommended that plans convert their current fixed income with all of its interest rate risk into a cash flow driven approach that specifically meets that plan’s Retired Lives liabilities. Furthermore, we suggested that the remaining assets could be managed more aggressively in order to meet the remaining Retired Lives liability and all future active liabilities now that the near-term benefit payments have been defeased.

We’ve described this process as a “sleep-at-night” strategy for the plan sponsor who no longer has to worry about such annoying things such as liquidity, interest rate risk, next month’s benefit payments or for that matter the next 10-year’s benefit payments, and/or significant market declines, as the investing horizon will have been extended by 10 years, and we know that over most 10-year periods (>80%) of time equities outperform bonds. How nice would it be to inform your plan participants that no matter what is transpiring in the markets today or any day during the next 10-years, that your benefits are absolutely secured for the next 10 years? How comforting that must be.

Corporate America has engaged in de-risking activities for years, but they have been inspired to reduce risk for the expressed purpose, in many cases, to terminate their pension plans. They have also been incentivized because of more rigorous accounting standards imposed on them through FASB. Both public and multiemployer plans have been slow to adopt de-risking approaches as they continue to believe that managing a pension system is all about achieving the return on asset assumption (ROA). In fact, instead of de-risking many plans have injected more risk into their asset allocation as they’ve pursued more private and alternative investments that come with their own set of liquidity challenges. Need cash in the near-term because you don’t want to sell into this market correction? well, you aren’t getting it from the private/alternative program.

I admire pension trustees who spend endless hours in meetings around the country attending various conferences, such as IFEBP, FRA’s Made In America, Opal’s public fund forums, state specific programs such as FPPTA, TexPERS, IPPFA, and 100s of other well-intentioned gatherings. But, the information that is shared should become the basis for asking questions and challenging the status quo. Unfortunately, we as an industry have done the same things for years despite the fact that many pension plans have been shuttered during the last 40+ years. Isn’t it about time that real change was enacted so that our plan sponsors could actually approach their participants with the great news that all is well – your benefits are secure!