According to Milliman’s survey of the largest US 100 public DB pension plans, funded ratios collapsed to 66% from year-end’s 74.9%, as plan’s recorded an average decline of nearly 11% for the quarter. The devastating decline was the largest ever recorded by Milliman in the history of producing their firm’s public pension funding index (PPFI). Furthermore, the losses ($419 billion in market value) wiped out all of the improvement generated by these funds in 2019.

The weak quarter impacted these plans in many ways, as the current deficit (liabilities – assets) ballooned to $1.82 trillion from $1.33 trillion just three months prior. The total liability for this universe of public plans now stands at $5.36 trillion. Only 4 plans currently remain at >90% funded ratios, while 35% of the plans are now below 60%. Can you imagine what these stats would look like if pension liabilities were discounted at a more legitimate rate than GASB’s ROA?

I want to once again thank the folks from Preqin for providing the following chart:

I’m not surprised by these results, but the responses may be quite premature. How many plan sponsors and consultants have seen performance results for the first quarter? Do they truly know how private investments in both equity and fixed income have been impacted by the closing of the US economy? I’ve seen reports guesstimating that the average private equity fund could be down substantially. It is one thing to claim that your ship is steady as it goes, but the tsunami may truly alter your course!

As we will be discussing on the Opal/Ryan ALM webinar today, there is a way to enhance the cash flow necessary to meet current benefit payments, while extending the investing horizon for all of this private investment. We are happy to share those details.

We once asked where the beef was, and if she were alive, Clara Peller would be able to tell us. As an industry we think we understand where the beta is, but do we really? As the chart below indicates (thank you, Preqin), hedge funds once again proved that most of their exposure is still nothing but beta. Where was the alpha or hedge? Yet, we as an industry continue to pay ridiculous levels of fees to gain exposure to them. Why?

Comparisons don’t look any better as we extend the time frame to 10-years or even 20-years, despite the inclusion of 3 sharp market sell-offs. It might make sense for endowments and foundations or HNW individuals to use hedge funds given that they have an absolute orientation because of their annual spending policy, but it really makes no sense for pension systems given that their mandate is a relative one – plan liabilities. Cheap beta (S&P 500) is much cheaper today than at year-end, and the cost to access it is a basis point – not some formula that includes high base fees and a percentage of gains.

Multiemployer pension reform has been decades in the works with still no outcome that protects and preserves the earned benefits for millions of American Workers. As Congress debates the merits of HR397 or some bi-partisan piece of legislation the cost grows and the economic impact looms ever larger. The full impact of the current economic crisis brought about by Covid-19 is not yet understood, but we know that it is having a major impact on Pension America from the loss of asset values, to growth in liabilities (using a legitimate discount rate), to the loss of jobs and contributions. Something needs to be done almost immediately or a significant percentage of the Critical and Declining plans will be lost forever. The PBGC is not currently funded to handle anywhere close to the number of participants that might become their responsibility.

The debate continues to rage over whether or not this legislation is a government bailout despite the fact that low-interest loans to sure up these plans will have 30-years to make interest and principal payments. That is 30-years of benefit payments that wouldn’t be received if these critically important funds are allowed to fail, and they will fail without help now! There is no way for these cash-starved funds can earn their way to solvency. We actually have a wonderful environment to provide these loans as 30-year Treasuries are currently trading at 1.21% and the loan would be issued at that the prevailing rate plus 25 basis points.

According to several sources, including the NIRS and Michael Scott, Executive Director, NCCMP, the Federal government stands to lose far more in lost tax revenue than they would gain by doing nothing at this time. It is estimated that in 2015 alone, the multiemployer system provided $158 billion in taxes to the U.S. Government. They also provided $41 billion in pension income to retirees and paid more than $203 billion in wages to the 3.8 million active workers. Combined, the pension and wage income supported 13.6 million American jobs and generated $1 trillion in GDP. Furthermore, original estimates for the then 114 Critical and Declining plans (now roughly 130) calculated that $32 billion in tax revenue over 10-years would be lost to the Federal government should the C&D plans be allowed to fail. That $32 billion was more than 50% of the expected “cost” of the loan program. Lastly, this estimated cost would decrease with every loan that is repaid, and with these low interest rates, that probability is improved.

Obviously, we are in unprecedented times, and much needs to be done to sure up our economic system, the businesses, and workers before this crisis escalates beyond our capacity to rescue it. However, that doesn’t mean that retirees should be ignored at this time. They deserve every protection that any other American is receiving at this time. Failure to secure funding is not an option.

We are very pleased to announce the launch of Ryan ALM’s new website. Please check us out at RyanALM.com. Hopefully, you will appreciate the look and feel of the site, but more importantly, you’ll be able to find the information that you seek with ease. We welcome your feedback, especially if you find our site wanting for any reason. Thank you, and stay healthy!

Forbes has an article in their latest edition that speaks to the strengths and weaknesses of the US retirement industry. I think that a real strength for plan participants in the retirement industry is a traditional pension plan that provides a monthly benefit no matter what is happening to markets. When discussing the strengths for 401(k) plans the Forbes writer highlights the fact that “these plans have enabled millions of workers to accumulate savings to supplement Social Security and any pension or annuity benefits that they receive”. Okay, but that’s not a lot to hang one’s hat on.

Under weaknesses they highlighted the fact that only about 50% of workers have access to a 401(k) plan and plans often fail to help participants convert retirement savings into a monthly income stream (annuity). That’s it? Those are the main deficiencies? How about the fact that plan participants must fund these accounts, then manage, and lastly disburse this benefit. What about the fact that a majority of Americans are now living paycheck to paycheck and can’t possibly afford to make contributions into a retirement account. This Covid-19 crisis is certainly highlighting this sorry state of affairs.

Furthermore, Corporate America is already announcing the elimination of their company match into these programs, which reduces by about 50% the annual contribution made into these accounts. This is a similar action that we witnessed following the Great Financial Crisis that ended in April 2009. In addition, Federal Reserve action to dramatically lower rates during the last 10+ years is forcing many plan participants and recent retirees to assume more risk in an attempt to preserve their retirement corpus. As a result, many participants went into this latest severe market downturn invested in less liquid, equity-like products as opposed to being in investment grade fixed income instruments that paid a decent yield and that which would provide some income to help reduce the call on principal.

Furthermore, we now have emergency actions by Congress that will allow plan participants to withdraw from 401(k) plans penalty-free up to $100,000. There are clearly many emergency situations being faced by members of our society, but permitting these withdrawals is only taking from Peter to pay Paul, and will certainly jeopardize their long-term financial security. It further highlights that these plans are nothing more than glorified savings accounts. We need to reinstate pension plans as the true retirement vehicle. Defined contribution plans are great as supplemental income funds, but they shouldn’t be anyone’s primary retirement vehicle. Asking untrained individuals to handle this responsibility is just poor policy.

Ryan ALM in conjunction with the Opal Group is presenting a two-part webinar series on Pension Lessons Learned beginning tomorrow April 15, at 2pm EST. The first session “Protection From Market Disruptions” will discuss the issues surrounding Pension America’s struggles to stabilize both the funded status and contribution expense, while providing a detailed process on what we believe DB pension systems need to do to protect and preserve these critically important benefits.

Here are the links to the webinar:

Website: https://opalgroup.net/conference/pension-lessons-learned-2020/

Registration link: https://zoom.us/webinar/register/6015852510588/WN_PM4XlQuNR9aL7N78aDR4tQ

The second webinar titled “Enhanced Asset Allocation” will be April 22nd at 2pm, and we are excited to announce that Brad Heinrichs, President/CEO, Foster and Foster, who will provide his perspective on asset allocation from an actuarial standpoint, will join us. We hope that you will join us, too. Don’t be shy to ask questions either during the sessions or after, as we are excited to discuss these topics with you. Have a great day and stay healthy.

You may recall that in August 2016, I penned the following blog post –

New Jersey slashes hedge fund portfolio in asset class overhaul
The New Jersey State Investment Council on Wednesday unanimously approved an overhaul of its hedge fund portfolio for the New Jersey Pension Fund including cutting the target allocation in half, reducing the number of hedge funds and cutting fees significantly. (P&I Daily)

I don’t know who first had the “brilliant” idea to allocate so much of NJ’s DB pension portfolio to alternatives following the GFC when cheap beta was so severely discounted, but to now slash the allocation when equity and fixed income valuations are stretching their limits is ridiculous!

First, DB plans have a relative objective (plan liabilities) and not an absolute objective; despite the fact that plans think they need to achieve the ROA.  These aren’t endowments or foundations with positive spending policies. Liabilities are missing in action when it comes to investment structure and asset allocation decisions, and it is leading to the injection of too much risk into their funds.

We are huge proponents of DB plans being the retirement vehicle of choice, but they need to be managed responsibly.  First, identify the primary objective (liabilities) and manage to that objective.  Second, STOP buying high and selling low. Furthermore, I think that the fees associated with hedge funds are outrageous and in most cases, unwarranted, but the NJ plan already has the exposure. Don’t sell it now, as you just might need some uncorrelated assets in the coming months.

I bring this up again, because focusing on the return on asset assumption (ROA) keeps plans chasing performance. I have no idea what NJ was trying to “hedge” in 2009 after the U.S. equity market was already haircut by 50%, but they built a very large hedge fund portfolio only to unwind about $7 billion of it by 2016, which was well after they already suffered the lost opportunity cost of not having been in cheap beta after the GFC. I suspect that they would have loved that exposure heading into 2020. Unfortunately, NJ is not unlike many (most) pension plans that chase performance in the HOPE that they achieve the ROA.

How many pension systems moved into commodity or other inflation hedges in 2009, as a result of fear that Federal stimulus would prove to be inflationary? I don’t know to what extent, but I know that it was massive. Well, it shouldn’t be shocking that we didn’t get inflation, but worse, the S&P GS Commodities Index is down -10.6% / annum for 10-years! Pension systems would have done so much better had they just managed to their plan liabilities during the last 20-years, as bonds (BB Agg.) have outperformed equities (S&P 500) during this period of time, with so much less volatility. But, we never learn!

Willis Towers Watson conducted a study of pension plan data for 376 Fortune 1000 companies that sponsor U.S. DB plans (RDK’s editorial comment: really too bad that only 376 of top Fortune 1,000 offer a DB plan). Results of the study indicate that the aggregate pension funded ratio is estimated to be 79% as of March 31. This is a significant drop from 87% registered at year-end. This level of funding marks the lowest funded status plans have experienced since 2012, when the year-end funded status stood at 77%.

The 376 plans now have an estimated pension deficit of $365 billion as of March 31, which is dramatically greater (up $136 billion) than the $229 billion deficit at the end of last year. Unlike pension asset values that plummeted, pension liability growth was more muted despite falling interest rates, as corporate bond spreads widened considerably. The total estimated liability stands at $1.76 trillion up from $1.75 trillion at December 31, 2019.

What I find most disconcerting about this result is the fact that Corporate America has done a much better job of taking risk off the table. I can only imagine the hit that DB plans in the public and multiemployer space took as a result of having much more aggressive asset allocations that favor equities and equity-like products relative to fixed income. Furthermore, both public and multiemployer plans entered this market disruption in poorer shape than Corporate plans.

We are pleased to share with you the Ryan ALM Q1’20 Newsletter. As we’ve been reporting, 2020’s first quarter is one of the more challenging quarters ever faced by Pension America. The combination of rising liabilities and falling asset values reeked havoc on funded statuses and will likely lead to ever growing contribution expenses in an environment where additional revenue may not be available to meet such needs.

We hope that you find our insights helpful. We remain focused on our primary objective, which is to secure the promised benefits, while providing as a secondary objective the time necessary to potentially enhance benefits down the road. Please don’t hesitate to reach out to us, as we are here for you. Stay healthy and strong.