Pension Indicator Updated for August 31, 2018

"Education is What Remains After One has Forgotten Everything Learned in School" - Einstein

By: Matthew Klein, Principal, Findley

In a nod to school returning to session for another year, I thought it was appropriate to give a quick lesson in basic actuarial fundamentals.

Our fundamental equation is B + E = C + I, where

B = Benefits

E = Expenses

C = Contributions

I = Investment Returns

Since accrued benefits cannot be taken away, there usually is little that can be done with B. A lot of consulting has occurred the past few years to deal with increasing expenses, namely the rapidly rising PBGC variable rate premiums. If you are a plan that has already completed some de-risking exercises, there may not be much else to influence E.

That leaves us with the inflow, C + I.  What becomes quickly apparent is that in the face of a constant outflow (B +E), contributions and investment returns are inversely correlated.  Here is where the dilemma begins. Every plan sponsor wants to minimize C, but that requires maximizing I. To maximize investment returns, one needs to take as much risk as possible.

Most consultants and investment advisors have been trying to educate plan sponsors for many years now that maximizing investment returns eventually ends up in trouble at some point because of the volatility inherent in maximizing returns. When investment return collapses, contributions have to go up. Almost always, the actuary gets the “Bad Timing” award by coming in and telling sponsor to significantly increase contributions when that lack of investment return impacts so many other parts of the business, possibly including its own stock price.

So the next time your actuary tries to consult with you to contribute more than the minimum funding requirement, he or she is actually looking out for the good of the business!

As always, thanks for reading, and drop us a comment on how we're doing.

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Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as investment advice. Performance data represents past performance.  Past performance is not indicative of future results.

Year to Date Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) 6.3% 5.2% 2.9% -0.1%
 Recently Frozen 7.9% 6.8% 4.4% 1.4%
 Ongoing Traditional 9.7% 8.5% 6.1% 3.0%
 Cash Balance 6.8% 5.7% 3.3% 0.3%
Month-over-Month Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) 0.4% 0.3% 0.1% -0.1%
 Recently Frozen 0.3% 0.3% 0.0% -0.2%
 Ongoing Traditional 0.2% 0.2% 0.0% -0.3%
 Cash Balance 0.3% 0.3% 0.1% -0.2%
12-Month Change Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) 13.4% 11.5% 8.9% 5.2%
 Recently Frozen 13.9% 12.0% 9.3% 5.6%
 Ongoing Traditional
14.3% 12.4% 9.8% 6.0%
 Cash Balance 13.8% 11.9% 9.3% 5.5%