It has been a very long time since I was in high school, and as a result, things may be different today. But, what I remember about my high school days and the dances at Palisades Park, NJ, were that the boys stood on one side of the gym and the girls stood on the other. Occasionally a couple of girls would dance, but there was little fraternizing among the boys and girls.
Well, I get the same sense about the management of DB pension plans today, as I did at those dances a very long time ago. It seems to me that we have on one side of the “gym” assets and on the other side is liabilities, and never the twain shall meet. As a result, DB plans haven’t found their rhythm and there is no dancing!
We get periodic updates from a number of industry sources highlighting how the funded status is improving or deteriorating. But we don’t seem to get a lot of direction on how we should mitigate the volatility in the funding of these extremely important retirement vehicles. I can say with certainty that it isn’t striving to achieve the ROA. That’s been tried, and DB plans continue to see deterioration in their funded ratios.
For too long, the asset side of the pension equation has dominated everyone’s focus, and as a result, a plan’s specific liabilities are usually only discussed when the latest actuarial report is presented, which is on a one or two year cycle. This isn’t nearly often enough. We suggest that the primary objective for the assets should be the plan’s liabilities, and that every performance review start off with this comparison. However, in order to get an accurate accounting of the liabilities one needs a custom liability index (CLI).
In order to preserve DB plans we need assets and liabilities dancing as one. Without this, DB plans face a very uncertain future. Are you ready to bring both parties to the dance floor?