Pension America – Taking Control Of One’s Destiny

For pension plan participants defined benefit plans (DB) must remain the backbone of the US Retirement Industry

The true objective of a pension plan is to fund liabilities (monthly benefits) in a cost effective manner with reduced risk over time. Unfortunately, it has been nearly impossible to get a true understanding of a plan’s liabilities outside of the actuary’s report, which is received by sponsors and trustees only on an annual basis, at best, and usually many months delinquent.

Fortunately, a plan’s liabilities can now be monitored and reviewed on a monthly basis through a groundbreaking index developed by Ron Ryan and his firm, Ryan ALM – The Custom Liability Index (CLI). The CLI is similar to any index serving the asset side of the equation (S&P 500, Russell 1000, Barclays U.S. Aggregate, etc.), except that the CLI measures your plan’s specific liabilities and not some generic liability stream. This critically important tool calculates the present value, growth rate, term-structure, interest rate sensitivity of your plan’s liabilities, and other important statistics such as, average yield, duration, etc. With a more transparent view of liabilities, a plan can get a truer understanding of the funded ratio / funded status.

The use of the CLI enables plan sponsors, trustees, finance officials, and asset consultants to do a more effective job allocating assets and determining funding requirements (contributions). The return on asset assumption (ROA), which has been the primary objective for most DB plans, should become secondary to a plan’s specific liabilities. Importantly, as the plan’s funded status changes, the plan’s asset allocation should respond accordingly.

Importantly, the CLI is created using readily available information from the plan’s actuary (projected annual benefits and contributions), and it is updated as necessary to reflect plan design changes, COLAs, work force and salary changes, longevity forecasts, etc. In addition, the CLI is an incredibly flexible tool in which multiple views, based on various discount rates, can be created. These views may include the ROA, ASC 715, PPA, GASB 67/68, and market-based rates (risk-free), with and without the impact of contributions.

Why should a DB plan adopt the CLI? As mentioned above, DB plans only exist to fund a benefit that has been promised in the future. As a plan’s financial health changes the asset allocation should be adjusted accordingly (dynamic). Without having the greater transparency provided by the CLI, it is impossible to know when to begin de-risking the plan. You’ve witnessed through the last 15 years the onerous impact of market volatility on the funded status of DB plans and contribution costs. Ryan ALM and KCS can help you reduce the likelihood of a repeat, and very painful, performance.

Let Kamp Consulting Solutions Be Your DB Plan Advocate

Since KCS’s founding in August 2011, we have worked tirelessly to preserve defined benefit plans as the retirement vehicle of choice for both employees and employers.  Now, more than ever, our effort is needed.  With each passing day, week, month and year, it is becoming increasingly obvious that defined contribution plans are nothing more than glorified savings accounts, at best!

The Federal Reserve’s Household survey, released earlier this week, highlights the challenges facing or employees in trying to save and manage their retirements, as a significant portion of our labor force have accumulated nothing for retirement.  As we’ve stated on numerous occasions, there will be profound social and economic consequences for the US if we can’t manage its workforce through a dignified retirement.

The US economy is still only muddling through 6+ years following the great financial crisis. Much of the “credit” for the muted recovery and lower demand for goods and services can be attributable to weak wage growth.  Importantly, the modest growth in wages doesn’t just impact demand today, but it makes saving for tomorrow that much more challenging.

We need to secure our employee’s retirements through a monthly annuity structure that is best achieved through a DB plan or DB-like structure, such as Double DB. Unfortunately, the elimination of DB plans has been on an accelerated path, and according to the DOL, there are fewer than 25,000 active DB plans today (down from roughly 150,000 in ’86). We’ve seen estimates that the median DC account balance is <$15,000.  An account balance of that size will hardly get one through a year, let alone a retirement.

Furthermore, we shouldn’t be vilifying those employees who are fortunate to be in DB plans, but we should explore opportunities to extend their reach for those that aren’t.  Despite the fact that there are many plans that appear to be dramatically (and maybe unsustainably) underfunded, there are new approaches to the management of DB plans that can be implemented, which will set a plan on a glide path to financial wellness.  We sincerely appreciate that funding volatility can create havoc for both corporate and public entities, but that funding volatility can be mitigated, too.

The last thing that we want to witness is the further erosion in the use of DB plans in favor of DC offerings.  No one is going to win if that occurs. The impact on the employee is obvious, but has corporate America truly assessed the impact from a failed retirement system on the ability of US citizens to remain active members of the economy? KCS has the tools to stabilize and improve the funded status of your DB plans to truly make them viable offerings for the long-term. Let us be your advocate, especially if there is an attempt to freeze or terminate your plan at this time.

Rethink the Use of Fixed Income in a Defined Benefit Plan

With the closure of the first quarter, we’d like to remind you of a blog post that we first published in early January.  Our thoughts are still relevant, especially given the market action within fixed income during the quarter and what is transpiring in US fixed income today.  The 10-year Treasury has rallied 2% today, and we think that it may continue to move lower.  The following paragraphs are what we originally posted.

What I’d like to highlight today is a new use for a plan’s current fixed income exposure. In day two of the conference, I attended a panel discussion titled, “Opportunities in Fixed Income and Credit Markets”.  The panel was occupied by 4 senior investment pros (plan sponsor, consultant, and investment managers).  They generally discussed the likelihood that interest rates were going to rise (I’m beginning to wonder if there is anyone out their who doesn’t think that rates will rise), and the implications of that movement on traditional fixed income portfolios.  Most of the panelists talked about various sub-sectors (mortgages, asset backs, bank loans, etc) and which ones might hold up better. There was discussion about shortening duration, etc. They also talked about fixed income’s traditional role as an anchor to windward, a risk reducer, and a provider of liquidity.

However, only one individual mentioned taking a step back to truly contemplate the “role” of fixed income.  He didn’t provide any further perspective, which is why I’m addressing the issue here and today.  I believe (as do my partners at KCS) that a plan’s liabilities should be the focal point of any pension discussion.  As such, they need to be the primary objective for the plan, the driver of asset allocation decisions and investment / portfolio structure.  The asset class most similar in characteristic to liabilities is fixed income.  As such, fixed income needs to play a prominent role in a defined benefit plan.

Instead of worrying about the implications from a rising interest rate environment on an LDI strategy that currently consists of long duration corporates, change the emphasis to matching near-term liabilities, by converting your current fixed income portfolio into a Treasury STRIP portfolio that matches cash flows with projected benefits (Beta portfolio).  First, you are improving liquidity.  Second, duration is shortened in an environment that may not be conducive to long bonds.  Third, you are lengthening the investing time horizon for the balance of the corpus, which will allow asset classes / products with a liquidity premium a chance to capture that performance increment (Alpha portfolio). Finally, the funded status and contribution costs should begin to stabilize.  As the Alpha portfolio outperforms liability growth (hopefully), siphon excess profits and extend the beta portfolio.

This is a proactive move to restructure the fixed income portfolio in an environment of uncertainty.

Lastly, I am not of the general school of thought that interest rates are definitely going to rise, and soon.  I believe that we still have slack demand in our economy, brought on by underemployment, which will keep inflation in check and provide room for stable to slightly lower rates.

Ryan ALM Pension Newsletter

Ryan ALM Pension Newsletter

The Ryan Pension Letter December 2013 
Ryan ALM Pension Letter is a quarterly newsletter that measures pension asset growth vs. pension liability growth based on ASC 715, PPA spot rates, PPA MAP-21, GASB and market discount rates. Ryan ALM Pension Letter also reviews a wide range of topical subjects related to pensions and global economic events.

Ryan ALM is a KCS strategic partner providing custom liability indexes to the KCS DB clients.  Ron’s work is cutting edge.  Enjoy!