The real economy may not have reached its apex of growth in terms of GDP, unemployment, optimism or other measures, however the markets have largely recovered their value lost during the financial crisis. It is September 16th, 2013 and several parts of the stock market have attained new highs. The S&P 500 is hovering near its all time high of 1700. Emerging markets hit a 3 year high The German DAX index breached its record high and European shares also rally to a five year high. Similarly, fixed income investors have largely been collecting income over the past years and they have mostly been shielded from the largest shocks since the crisis. Despite a rough year to date in 2013, fixed income investments generally have retained their value, and also grown, in the past 5 years.
Thus, broadly speaking, patient investors who held their ground should have largely recovered the losses taken over since the financial crisis.
Knowing this, we have observed, with some dismay, that Funded Status has not improved for a lot of DB plans over the past few years despite the fact that the markets have roared ahead in terms of asset recovery. Funded Status is the simple ratio of assets divided by liabilities and it is a reflection of the health of a pension plan. When asset prices plummet, you expect plan to be less healthy (i.e. – funded status goes down). However, the issue now is the denominator of this ratio - liabilities - have not improved. Plan and investment committees that have been counting on market recovery alone to manage shortfalls in Defined Benefit plan management are coming to the conclusion that market activity is not enough. Having a traditional investment perspective, which may include an investment consultant who understands, vets and monitors investments – the asset side of the equation, is necessary but still insufficient. Understanding the entirety of the plan and working with the consultants, actuaries and committee members to design a solvent plan structure, schedule forthcoming liability payments, and adjust plan status (i.e. – frozen, open, closed) is crucial to managing the unfunded liability risk inherent to DB plans.