Tag Archives: Liabilities

04.22.15
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What is Consulting PLUS?

During the last decade or so, the rage within fixed income investing has been for plan sponsors to seek or investment managers to offer Core Plus fixed income capability. The investment thesis put forward is that a fixed income manager with multiple capabilities can enhance the risk / reward behavior of a single core capability.  The enhancements may be in the form of exposure to such instruments as high yield, international / emerging debt, bank loans, secured debt, etc.  One of the thoughts supporting this concept is that managers should be able to do a better job, on average, than committees in timing exposures and implementing asset shifts.  We agree that by providing a manager with greater investment freedom and breadth the investment process should see an improvement in its risk / return characteristics.

Given the troubles that continue to plague traditional defined benefit plans, especially as it relates to funding them, we, at KCS, feel that this idea should be expanded to other aspects of pension management, including asset consulting.  It seems to us that the asset consulting industry needs to rethink its approach from one focused exclusively on the asset side of the equation to one that rightly focuses on the plan’s liabilities, too.

We’ve written numerous times on the benefits of measuring a plan’s liabilities through the creation of a custom liability index.  Importantly, the output from this exercise helps one better understand their plan’s liability growth rate, term structure and interest rate sensitivity.  Without this insight, how does one allocate assets?  Since every plan’s liabilities are unique, it doesn’t make sense that a generic 8% return (ROA) target could adequately and effectively guide one’s asset allocation.

The seven senior members of KCS’s team have well over 200 years of combined, relevant investment experience. In addition, our senior talent have worked with and consulted to many of our industry’s largest plan sponsors. We understand the asset side of the equation as well as any other firm, while also understanding its limitations, especially in the short-term. Importantly, with KCS you get the PLUS. We are unique in our ability to measure and monitor liabilities, and to use the output to drive asset allocation and our risk-reducing glide path toward full funding.

Why settle for just asset consulting when you can have Consulting PLUS through a firm that knows both ASSETS and LIABILITIES!  If providing greater breadth in fixed income enhances the risk / reward characteristics just wait until you see how adding liability insights enhances your traditional consulting relationship.

09.18.14
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Maintain Your Asset / Liability Mismatch At Your Own Peril!!

Recent news from around the world indicates that growth is slowing in nearly every region. Japan and China are pumping liquidity into their systems to encourage more growth. Europe, an unmitigated disaster, will need to continue to provide stimulus, and not austerity, in order to get their citizens working and consuming. The US continues to plod along, but given our trading partners’ struggles, it would be naive of us to think that our ability to export goods won’t be negatively impacted.

With that said, US interest rates remain significantly above those of our partners in Europe and elsewhere, particularly in the 5- and 10-year space. The US rates provide real value relative to these other countries, and so it is likely that the value will be captured as investors seek those higher yields.

In the US pension arena, most plans continue to be dramatically underweight fixed income, as they fear higher rates and yields that are well below the ROA. Stop! The ROA isn’t the objective, and rates aren’t necessarily going higher. The only asset that moves in lock step with a pension plan’s liabilities is fixed income. We have a major funding issue in the US that will be exacerbated should rates continue to fall.

A new direction is needed in the day-to-day management of DB plans. Call us if you want to receive our insights.

04.14.14
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KCS First Quarter Summary

KCS First Quarter Summary

We are pleased to share with you the KCS First Quarter Summary. The markets proved to be more volatile during the last three months, but still positive when all was said and done. Unfortunately, plan liabilities outperformed assets by more than 5% during the quarter, reversing the trend that we witnessed in 2013. Importantly, KCS continues to provide education to a variety of market participants through various conference appearances. We feel that this is one of the most important functions for any asset / liability consulting firm.

03.26.14
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TIme for a New Gameplan?

TIme for a New Gameplan?

As we touched upon in our January, 2013 Fireside Chat, the Private, Public and Union pension deficit in America exceeds $4 trillion, when assets and liabilities are marked to market. Since 1999, pension asset growth has significantly underperformed liability growth and the return on assets (ROA), causing increased contribution costs and a national pension crisis. The true objective of any pension plan is to fund their liabilities (benefit payments) at low and stable contribution costs –with reduced risk through time.

Do you need a new game plan? We’ll explore the asset allocation issues sponsors face and offer solutions for underfunded plans.


 
01.15.14
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Asset Consulting Firms and Their Consultants Aren’t Commodities

The environment for asset consulting firms is quite challenging.  Historically, there have been few barriers to entry, and measuring the value-add provided by the asset consulting firm has been difficult to gauge.  As such, hiring decisions have often come down to price, with the low bidder more often than not winning the assignment.  For those firms fortunate to be given an assignment, the life cycle of the relationship is generally fairly long (about 7 years), as it usually takes a departure of the consultant or a major screw up before the relationship is terminated.  This practice has to change.

Given the current state of defined benefit plans in the US and abroad, this is not the time to fiddle while Rome burns. It is imperative that asset consultants be judged for the value that they bring to a relationship, and they should be compensated based on that value-add.  There are many services that consultants provide, but the importance to the success or failure of a plan varies widely.  Establishing the right plan benchmark is critical, and it isn’t the ROA. We believe that it should be the plan’s specific liabilities. The investment structure and asset allocation that flows from a greater knowledge of the liabilities are key decisions that drive most of the plan’s subsequent return. However, it seems to us that most of the time (80/20 rule) is spent on trying to identify value-added managers. Get the wrong asset allocation and the best performing managers in the weakest asset class won’t help you much.

Let’s see if the industry can refocus on the importance of DB plans, so that we can stabilize the retirements for both our private and public workers.  As such, let’s begin to evaluate consulting firms that can improve the funded ratio and funded status, while minimizing contribution costs. These are the important metrics when evaluating a consulting firm and their consultants.  Experience matters in this industry.  We pay great homage to it on the asset management side of the business.  Why isn’t this as critical when evaluating asset consultants?  Remember: asset consultants have a greater impact on your plan than any individual manager does!