Samantha Fillmore is reporting on the Heartland Institute’s website that Colorado Public Employees’ Retirement Association has enacted some reform measures to help them close a huge funding gap. However, the reforms seem quite modest, at best.

It is being reported that the State’s defined contribution plan will be made available to local government members in the PERA defined benefit plan, which until now had only been available to state workers.  In addition, contribution rates for those remaining in the plan will escalate from 8% to 11% of pay during the next two years.

But, it doesn’t seem that PERA employees will be mandated to now participate in the DC plan. Sure, employees participating in the DC plan will now have the option to move assets with job changes, but they are still going to be responsible for funding, managing, and dispersing this retirement benefit with no promise of a set benefit upon retirement. We wonder just how many local government employees see this as a positive change?

What isn’t addressed is how the pension assets are being managed. Are they still going to be trying to generate a return commensurate with an ROA target or will they take the prudent course and begin to manage their assets against a liability focus? Continuing to do the same old, same old doesn’t seem to reflect the reform that is needed to right this ship.

As a follow-up to our previous blog post, the St. Louis Federal Reserve is reporting that “real” weekly wages since Q1 1999 have only grown from $335 to $350 through Q1 2018. Is it not surprising that a significant percentage of Americans are either not saving for retirement or they are forced to tap into their retirement accounts to meet an outstanding debt or an emergency bill.

Come on, the cost of everything, including housing, education, healthcare, food, clothing, etc. would have a worker needing far more than an additional $15 per week for the last 20 years! Even the WSJ is reporting today that the anticipated wage bump from tax changes and the perceived tighter labor market are not being reflected in workers’ pay once adjusted for inflation. The timetable that they are highlighting is the most recent three years.

Despite recent strength in retail sales, diminishing real wage growth should negatively impact the US economy as the consumer gets more stretched. A further increase in debt will naturally lead to more Americans tapping into their retirement accounts, which just exacerbates an already untenable situation.

Sen. Sherrod Brown, D-Ohio, said during a hearing of the Joint Select Committee on the Solvency of Multiemployer Pension Plans that any proposal emanating from this body must address both the pension plans (1.3 million participants in failing plans) and the Pension Benefit Guaranty Corporation or the current crisis will only be repeated. We couldn’t agree more!

We are particularly pleased to read the comments from Sen. Rob Portman, a Republican on the panel, who said that if the PBGC fails, retirees from plans like the Central States, who are already facing the prospect of pensions cuts, would see reductions of about 90 percent if the PBGC becomes insolvent.

The potential loss of the pension benefits doesn’t only impact the recipient, but the broader economy. It is estimated that more than $1 trillion in economic activity was generated by the recipients of benefits from the 114 “Critical and Declining” systems in the last year.  In addition, there are more than 200 plans designated Critical. I wonder what the economic impact would be should those plans fail.

Los Angeles County Employees’ Retirement Association (LACERA) is considering adopting a new asset allocation change.  Under the new proposal, the “growth” category (global equity, private equity, and real estate) will see a 4% reduction from 50% to 47%.  However, private equity will see an increase from 9% to 10%. In addition, the credit bucket will increase from 7% to 12%, with Bank Loans, illiquid credit, and emerging market debt increasing. Haven’t we seen this use of illiquid assets negative exacerbate returns among endowments & foundations during the great financial crisis?

As we’ve discussed many times, the primary objective of any DB plan is to meet the promised benefits at the lowest cost, not the highest return. These recommendations have been put forward by the plan’s asset consultant, who we are sure spent a lot of time and resources to come up with this suggested change, but is this truly meaningful? In our opinion, DB plans need to return to the basics (focus on liabilities to drive asset allocation decisions), and not strive for a few basis points of excess return that also reduces the plan’s liquidity to meet the benefits.

Unfortunately, this asset allocation exercise is similar to others done on a regular basis, but at the end of the day proves to be meaningless. Does anyone really believe that increasing private equity by 1% will have a meaningful impact on a plan’s funded status or contribution expenses? Of course not! Let’s stop doing the same old, same old, and finally start to propose real and effective change. I’m tired of seeing pension plans just moving incrementally. At the end of the day the shifting of deck chairs on the Titanic didn’t really matter – did it?

Please get your mind out of the gutter.  The stripping activity to which we refer relates to the stripping of U.S. Treasury bonds, and it may be an indication that asset/liability management (ALM) is on the rise, particularly with regard to private pension plans. It is good to see, although we still prefer to use a cash-matching defeasance strategy to implement our risk-reducing pension management process focusing on near-term retired lives as opposed to a duration targeted approach. Furthermore, this shouldn’t only be the focus of private pension systems, as we believe that ALL public, private and multiemployer plans should be focused on providing the promised benefit at the lowest cost and they should be de-risking as they move toward full-funding.

The following information was received from J.P. Morgan.

May STRIPS update

Today Treasury released its Monthly Statement of the Public Debt (MSPD) for May, which showed P-STRIPS outstanding increased $5.9bn over the month, the third consecutive month of $5+bn. Over the first five months of the year, P-STRIPS outstanding has increased by $21.7bn, leaving us on pace for close to $52bn in 2018, after a record of $28.2bn in 2017 (Exhibit 3). This demand is clearly being driven by the sharp increase in the average funded ratio at the top 100 defined benefit pension funds, which has increased 8%-pts over the past year and risen to 91.5%, the highest level since October 2008 (Exhibit 4). Along the curve, the bulk of the activity was concentrated in the 28- to 30-year sector, which saw $8.7bn in stripping over the month, well above the prior 6-month average of $5bn, and the single largest month of demand for long STRIPS on record.

The source is the U.S. Treasury

2018 data is through May 31st, and it is not annualized.

Thank you, once again, to the folks at Asset.tv for their invitation to participate in a Masterclass on retirement income.   I learned a great deal from my fellow panelists, and I suspect that you will, too.  As always, please don’t hesitate to reach out to us with any questions that you might have from this session. We always enjoy hearing from those of you that regularly read our blog posts and watch our TV sessions.

• Establish a process for the periodic review of the selected TDFs
• Understand the fund’s investments and how they will change over time
• Review the Fund’s fees and investment expenses
• Inquire about whether a custom or non-proprietary product is a better fit for your plan
• Develop effective employee communications
• Take advantage of commercially available sources of data to review TDFs
• Document the process

Given that most employers/employees are engaged in DC-related retirement programs, the DOL and IRS are paying far greater attention to how well these plans are being structured and managed. It behooves the fiduciary committee for these plans to implement a review process similar to the one highlighted above.

In fact, this process would be beneficial for manager selection (and other decisions) outside of TDFs in employee-directed plans. Defined benefit plan committees should engage in a similar review process when managing their plans on a regular basis.

Managing a defined benefit (DB) plan has never been easy, but it used to be simpler. Why? The true objective of a pension plan should be to meet the promised benefits at the lowest cost and with manageable risk. This used to be the standard! Unfortunately, somewhere along the way, the “objective” became a return game – the return on asset (ROA) assumption.

This change in focus has lead to instability in the plan’s funded status and excessive volatility in contribution expense. DB plans are all but gone in the private sector, but they are still quite prevalent in the public and multiemployer arenas.  Will that continue to be the case? Not unless we go back to the future! Perhaps circa 1970 (pre-ERISA) when DB plans, like lottery systems, defeased their plan’s liabilities, ensuring that the assets would be there to meet future benefit payments.  Almost simple!

Many corporate plans have undertaken such an action and their plans are much more stable. They have used duration matching, annuity buyouts, and cash matching strategies to accomplish their objective. However, we believe that cash matching is the most cost-effective and precise method to match and fund a plan’s liabilities, and it is this implementation that is highlighted in the Butch Lewis Act that we’ve discussed on this blog.

We would be happy to share with you our insights and approach about how a cash matching defeasement strategy could help stabilize your plan’s funded ratio and contribution cost while setting the plan on a glide path toward full funding. As we’ve said many times, DB plans need to be protected but pursuing the same failed strategies (ie chasing returns) is not the way to accomplish your objective. Remember, managing a pension plan is about cost, not return.

Why are we supporting so vigorously the Butch Lewis Act? Primarily because we are fearful that hardworking participants in failing multiemployer plans will not receive the benefits that they earned through their hard work and years of dedicated service.  In fact, they likely won’t earn the minimum “guaranteed” payout should these “critical and declining” plans eventually become the responsibility of the Pension Benefit Guaranty Corporation (PBGC).  Outrageous!

PBGC Executive Director Thomas Reeder claimed in testimony before the Congressional Joint Select Committee on the Solvency of Multiemployer Plans that the PBGC “is in such financial dire straits that members of failed multiemployer pension plans would likely receive only one-eighth of the minimum benefits they are supposed to be guaranteed.”

As you may recall from previous blog posts, participants in multiemployer plans supported by the PBGC get a protected “benefit” that is already about one-fifth that of a participant in a single-employer plan. A further reduction of this potential magnitude would obviously be devastating.

During the hearing, Reeder was asked if the PBGC would be able to provide the minimum guaranteed benefit to failed plan members without congressional action (such as passing the Butch Lewis Act), and he responded “no”. He estimated that the PBGC would have to cut participant benefits to about one-eighth the minimum benefit, or less. “If they’re making $8,000 in guaranteed benefits today, they’d get less than $1,000,” said Reeder. That would be an annual payout, not monthly, as full minimum payment for a 30-year employee is only $12,800 under the PBGC’s minimum guarantee.