Given the news from this morning regarding US job growth (only 142,000 jobs added and revisions down in the previous two months), it would not surprise us to see US interest rates continue to fall. If in fact this happens, DB plans’ funded ratios and funded status will continue to weaken. As we’ve reported on numerous occasions, plan liabilities, although discounted at the ROA, do not grow at the same rate as assets.
Liability growth has far outpaced asset growth in the last 15 years, and the asset allocation mismatch that exists between a plan’s assets and liabilities continues to be dramatic. With most everyone expecting interest rates to rise, fixed income exposures have been reduced and bond durations shortened. A combination that continues to weigh on plan performance.
We continue to believe that weak global growth will keep interest rates low for the foreseeable future, and as such, fixed income exposures should be increased and reconfigured to meet near-term liabilities. I will be discussing this concept / strategy at the upcoming FPPTA conference on Tuesday in Naples, FL.
Plans continue to focus almost exclusively on their fund’s ROA, but the liability side of the equation needs some attention, too, especially given the prospects for continuing global economic weakness. In this environment, a plan will not close it’s funding gap through outperformance relative to its ROA.