We are pleased to share with you the latest article in the KCS Fireside Chat series.  In this article, Dave Murray, DC practice Leader, discusses financial wellness and other trends in the DC landscape.  We are confident that you will find Dave’s comments insightful.

In a KCS blog post from earlier today, we discuss the output from a recent WSJ/NBC news poll that highlights the uncertainty around retirement in the U.S. As we’ve reported on numerous occasions, there will be profoundly negative social and economic consequences of our failure to adequately prepare our workers for retirement.

Please don’t hesitate to reach out to us with your feedback and questions.

In a newly released WSJ/NBC news poll, only 13% of Americans expect to retire before age 60, down 10 points since 1999. At the same time, 28% of workers now expect to retire beyond age 70, if at all, which is up 10 points.  Alarmingly, 43% of working class whites, mostly in rural areas, now expect to retire after the age of 70. The social and economic impact of our declining retirement readiness is upon us!

What is interesting about 1999 is the fact that most DB plans in the U.S. were fully-funded at that point.  Instead of locking in that success, plans and their consultants threw caution to the wind by significantly reducing fixed income exposure as interest rates fell, while loading up on equities and alternatives. That decision has crippled Pension America, as funded ratios have plummeted and contributions costs have escalated.

With the demise of the defined benefit plan and the greater reliance on the defined contribution plan, this social and economic divide between the haves and the have-nots will continue to be exacerbated.

We’ve attached for you a video highlighting a discussion (debate) between Ron Ryan, Ryan ALM (and a KCS strategic partner) two leading actuaries, and an asset consultant.  The session took place at the Florida Public Pension Trustees’ Association (FPPTA) conference in June. It covers many hot topics surrounding defined benefit pensions today.  It is a lengthy video, but definitely worthy of your time.  As you will see, Ron is not shy about bringing new ideas to the fore. Regrettably, our industry suffers from incredible inertia.  Doing the same thing for the last 50 years hasn’t worked. It is about time that we challenged that operating approach before DB plans go by way of the dinosaur.

Please don’t hesitate to get back to us with any comments and/or questions.  We are happy to engage in this conversation with you.  As you’ve heard us say many times, we are exceedingly concerned about the potentially negative social and economic ramifications from our failure to preserve and protect the benefits from DB plans, whether they are sponsored by public, private, or multi-employer institutions.

Milliman, Inc. has released the latest update for their Public Pension Funding Index (PPFI), which covers the nations largest 100 public plans, and it indicates a slight pickup in the aggregate funded status from 72% to 73% as of June 30, 2017.  Obviously, any improvement is a good sign, but what will plan sponsors do in response? The U.S. equity market has enjoyed a nearly unprecedented bull market run since March 2009.  Despite this significant advance, funded status is still quite weak. What happens to public plans once this equity market peaks and begins to slide?

We believe that every pension plan should have a de-risking mind-set, and a glide path by which it removes risk as funded status improves. Sitting with a traditional asset allocation, when both bonds and stocks are nearing peak performance for their respective cycles, is not prudent. However, if the focus remains on the return on asset assumption as the primary objective, it is highly likely that public DB plans will continue to swing for the fences.

We’ve seen this mind-set creep into professional baseball during the last couple of decades, and what we’ve seen is a few more homers, but many more strikeouts.  At KCS, we don’t think that Pension America nor the employees, employers, or tax-payers who fund these plans can afford more strikeouts at this time! The funded status of public pension plans got hammered in both 2000-2002 and 2007-2009. We are seeing public DB plans eliminated and frozen during a period of time that has been favorable for traditional asset allocation strategies.  Can you imagine what will happen should we enter bear market territory for either or both of these asset classes?

DB plans are incredibly important for the average plan participant’s financial well-being. Let’s not screw up their futures by focusing on the wrong objective at this time. DB plans should be striving to meet the promised benefits at the lowest cost, not the greatest return. Striving for the latter guarantees more volatility, but not the promise of delivery.

I happened to see an article on the CNBC Money website highlighting the troubling issue surrounding the lack of financial literacy in our country. When asked three basic questions related to inflation, stock risk, and interest, 70% of respondents failed to correctly answer all three questions.

As disappointing as this result is it shouldn’t be shocking given the lack of financial literacy taught in our schools.  The article mentions that fewer than 50% of our states require financial leteracy to be taught in our public schools.  As an example, New Jersey has only a 2 credit course mandated to be taught in one’s Sophomore year, and it relates more to basic principals than it does to handling a retirement account.

What makes this particularly troubling is the fact that we continue to migrate our employees away from DB plans that are professionally managed to DC plans that force the individual participant to “manage” their account.  As you may recall, the DC plan was originally created as a means for wealthy executives to defer more income.  It was never intended to be anyone’s primary retirement vehicle.

Not surprisingly, this migration is creating a retirement crisis in our country.  Asking untrained individuals to fund, manage, and disperse their retirement account is poor policy, and the social and economic consequences of this action will be quite grave. I don’t need a survey to understand that something needs to change, and fast!

As a follow-up to our blog post (U.S. Debt Ceiling Debate – Blah, Blah, Blah) from yesterday, U.S. debt held by the Federal Reserve can be written-off at anytime, without consequence.  The result of this action would reduce current outstanding U.S. debt by more than $3 trillion, freeing up considerable room under the current debt ceiling, while eliminating the involvement of Congress to debate an unnecessary action.

Why isn’t this done? Regrettably, as we discussed yesterday, most of our Congresswomen and Congressmen have no clue as to how our monetary system works – none! Furthermmore, concern about the impact on the U.S. bond market from the future “dumping” of Treasury bonds has investors needlessly worrying about the potential that interest rates would rise.  This concern, although unfounded, would be eliminated by retiring our Treasury debt held by the Federal Reserve.

According to a recent article in the San Gabriel Valley Tribune, for only the second time CalPERS was forced to dramatically reduce promised benefits because of a default.  In this case, the benefits were slashed by about 2/3rds for the job-training agency LA Works.

The agency was formed when the cities of West Covina, Azusa, Glendora and Covina created the joint-powers authority in 1979. However, they technically aren’t responsible for the welfare of the employees after LA Works was dissolved in 2014.  That these communities have not been forced to pony up the promised benefits is beyond me.

Please don’t think that this event couldn’t happen in a community near you. We’ve seen a number of public entities file for bankruptcy protection, freeze/terminate DB plans, and shift employees to glorified savings accounts (DC plans).

The U.S. Congress is gearing up for another debate on the “debt ceiling”.  The WSJ is reporting that Mitch McConnell has said that there is a zero chance that the U.S. won’t raise the current level.  However, we’ve seen what happens in Washington D.C., so assigning a zero probability to anything is rather foolish.

That there is even a debt level discussion highlights the fact that most Congressmen and Congresswomen have no understanding of how our monetary system works.  The U.S. government has a fiat currency, which it issues under monopoly conditions and floats it freely on international currency markets.

The following points are from a recent blog post by Professor Bill Mitchell, a leading proponent of Modern Monetary Theory:

• A currency-issuing government cannot run out of the currency it issues.
• A government can afford, in financial terms, anything that is for sale in its own currency.
• There is no financial constraint on government spending, where that government issues its own currency.

Also according to Mitchell, “In that context, it is 100% correct to say that all policy choices are political rather than reflect any intrinsic financial constraint.”

I’m disgusted by what is and has been happening in D.C., so let’s finally get away from the politics, and begin to focus on the needs of our people, which include, education, healthcare, affordable housing, retirement benefits (Social Security), etc.

In a recent article on Foxbusiness.com, it was reported that the U.S. has fallen three notches in the global retirement rankings.  Although disappointing it cannot come as a surprise to anyone in our retirement industry. For a country as rich as ours, we are doing very little for the majority of our workers.

The issue isn’t just the demise of the traditional DB pension plan leaving very few with access to these important retirement vehicles, but it is compounded by the fact that most employees working in small companies (those with fewer than 50 employees) don’t have any access to an employer-sponsored plan.  Furthermore, we have done an incredibly poor job of providing financial literacy in our public schools.  Given this fact, why would we think that there would be a positive outcome from the migration of workers from DB plans to DC plans when the burden to manage this effort falls on the individual?

The article highlights the fact that we are living longer, which places a greater burden on our employees to save more, but for the average worker, incomes haven’t kept pace with inflation during the last two decades. Furthermore, although the “average” American may be living slightly longer, we recently reported on the fact that life expectancy has actually declined for those in the 45-55-year-old cohort that don’t possess more than a high school degree.

You want to improve outcomes? Let’s start by creating an educational system that does a more effective job of giving students the skills to meet the needs of tomorrow’s employers – not yesterday’s! Furthermore, let’s start investing in job growth and improved wages so that the average American can actually set aside some money for a potential retirement. There is a certain level of income necessary just to live, let alone to save for retirement. Many Americans (most?) aren’t there today! Shameful!

GoLocalProv is reporting that the St. Joseph Health Services of Rhode Island
pension fund has filed for receivership — the filing puts thousands of
pensions at risk.

This is one of the largest pension failures in Rhode Island in recent
history. It will take months to determine the total financial impact on the
pensioners.

What hasn’t been reported is the curent funded status of the plan (liabilities minus assets) or what lead to the funding crisis.  Unfortuantely, we will likely see more of these actions, especially if the US equity market begins to crack.