Control or Chaos - Rocky and Bullwinkle
The Pension Plan Epiphany
The first three articles in this series were a summary of the diversifiable risks in capital market securities, the role of “experts” for complicating them - and the economic chaos of regulatory force that compounds them. More importantly, each one concluded with an idea for the objective investor to regain control and confidence.
To concretize that, this essay will describe what happens when conservative projections, superior managers, blended benchmarks, social responsibility, sector overweights and tactical rebalancing are put into practice by institutional experts. In September 2008, a highly respected institutional money manager, Northern Trust, published a white paper that reported:
During the three-year period from 2000–2002, US pension plans suffered a dramatic decline in fortune. In the grasp of a horrific bear market in equities, the S&P 500 declined by almost 40% over this time span... This translated into a negative hit of 20% or more to the asset value of a DB plan.
What Northern Trust was trying to say is that pension plans became woefully underfunded, but notice the language, “a dramatic decline in fortune . . . the grasp of a horrific bear market.” To translate, that is MBA-speak for, “Hokey Smoke, Bullwinkle! We’re in real trouble now. Oh good, Rocky. I hate the artificial kind!’’ But it continues.
In a 2008 Government Accounting Office (GAO) study, 58% of large public pension funds did not meet the 80% funding threshold that is considered the minimum acceptable standard. Illinois was the worst at $54 billion underfunded with New Jersey a close second. According to the Center for Retirement Research at Boston College, “as of December 16, 2008 public pensions in the United States were underfunded by nearly $1 trillion.” But no government pensioner missed a check.
Or a Rocky observes, “Well, they don’t call him Wrong Way Peachfuzz for nothing.” Bullwinkle responds, “You mean they gotta pay?” No, you gotta pay. Regardless, the pension fund manager has a fiduciary responsibility to anticipate that possibility and have a contingency plan that is not called a “bailout.”
But for a pension plan’s survival, it became obvious that staying the course through volatile markets and arbitrary performance measurement was no longer acceptable, as Fifth Third Asset Management explained in 2007,
The benefits promised by their plans must be viewed as an obligation, both morally and financially. The ability to adapt to changing economic and market conditions is critical in the liability-funding arena. LDI is the process of identifying liability streams and matching those with incoming cash flows. Risk is defined as the volatility of a plan’s funded status.
Finally, a morally defensible investment strategy. Welcome to the party. To learn more, please click the link below.
https://www.amazon.com/Moneyball-Method-Middle-Class-Manifesto-Objective/dp/1696009111/