By: Russ Kamp, Managing Director, Ryan ALM, Inc.

I recently participated in a new program put on by the Florida Public Pension Trustees Association (FPPTA). They’ve introduced a higher-level program for trustees that really want to dive more deeply into pension issues. I’m thankful to have the opportunity to participate both as a speaker and a coach. At the inaugural event, the FPPTA leadership invited Von M. Hughes, the author of the book, U.S. Public Pension handbook”, which he described as a comprehensive guide for trustees and investment staff. During the Q&A session, Von was asked what differentiates a good fund from one that is performing poorly. His response was simple and direct. The pension systems that are best in class make the annual required contributions (ARC).

His response didn’t suggest anything about plans with internal staff versus those that outsource all investment functions. It had nothing to do with how complex the overall asset allocation was or the percentage allocated to alternatives. Furthermore, it didn’t matter about the size of the fund. It was simply, are you funding to a level required each and every year. Brilliant!

We all know which public funds are struggling and which are near full funding. There are enough entities reporting on the key metrics annual, if not more frequently. A closer look at these funds does support Von’s claim. But it isn’t just the lack of discipline in providing the necessary funding to secure the promises that have been met. There are also issues with regard to actuarial practices and legislative constraints. There is an interesting article in P&I with Brian Grinnell, former Chief Actuary, for the Ohio State Teachers’ Retirement System. Grinnell left the pension fund in May after more than 10 years, as the Chief actuary. According to Grinnell, he left the system because he “was not comfortable with the direction the plan was headed, and I didn’t feel like my continued participation would be positive.”

Grinnell discussed several issue, but the two that jumped out at me were the open amortization period and fixed contributions. In the case of the open amortization, Grinnell mentioned that “the amortization period for the retirement system’s unfunded pension liabilities under the STRS defined benefit plan had become infinite — meaning that it would never become fully funded.” Can you imagine having a mortgage with such a feature? With respect to the fixed-rate structure of both contributions and benefits, Grinnell mentioned that following a poor performance year the normal practice would be to increase contributions, which in the case of the Ohio plans is not possible without legislative action.

If creating a strong public pension system is predicated on the entity’s ability to meet the ARC, why would our industry agree to accounting and actuarial practices that restrict prudent action? Amortization periods should be fixed and contributions should be a function of how the plan is performing. As we’ve stated many times, DB pension plans are too critically important to millions of American workers. Investing is not easy. Forecasting the longevity of the participants is not easy. Let’s at least get the easy stuff right! Fund what is required!