Saturday, December 31, 2011

How many times does a stack of bricks need to fall on our collective heads?

The funded status of pension plans has been on a wild ride since 2008, experiencing major declines in 2008, 2010 and 2011. The drops were due to the “double whammy of declining equity markets and lower interest rates,” said Jonathan Barry, Mercer’s U.S. Retirement Risk & Finance DB Risk Leader, during a recent webinar.  How plan sponsors manage that pension risk volatility was the subject of a joint Mercer/CFO Publishing study, “Redefining Pension Risk Management in a Volatile Economy.  Mercer conducts a monthly analysis of the S&P 1500. At the end of November, it found that aggregate S&P 1500 defined benefit pension plans were underfunded by $391 billion, which means they were funded at 75%. This was down from a funding ratio of 88% in April 2011, Barry said. (Source:

Repeat after me ... the higher expected return of equity investments doesn't come without the corresponding risk.

Repeat after me ... the only way to de-risk bond-like liabilities is to invest in bonds.

Repeat after me ... EROA is a fiction without basis in financial economics.

Tuesday, December 20, 2011

First of many? One Year Later.

Retired police and firefighters from Central Falls RI have agreed to sharp pension cuts, a step thought to be unprecedented in municipal bankruptcy and one that could prompt similar attempts by other distressed governments.  If approved by the bankruptcy court, the agreement could be groundbreaking, said Matthew J. McGowan, the lawyer representing the retirees.  “This is the first time there’s been an agreement of the police and firefighters of any city or town to take the cut,” he said, referring to those already retired, who are typically spared when union contracts change. “I’ve told these guys they’re like the canary in the coal mine. I know that there are other places watching this.” [...] Central Falls had little choice. For years, its government failed to contribute enough to its police and firefighters’ pension fund, and the fund effectively ran out of money this fall. The city, which had also promised the retirees comprehensive health benefits, could not cover the pension and health payments out of its general revenue.
(Thanks to MPC for the link.)

Sunday, October 16, 2011

Society of Actuaries 2011 Annual Meeting (Chicago)

Monday, October 17
Session 8: JRM Section Hot Breakfast –  Emerging Risks
Session 13: Opening General Session
Session 17: Is the Arithmetic Mean of Past Returns the Best Estimate of Expected Return?
Session 32: Investment Risk and Return – Theoretically Related – Empirically Not So Much
Session 41: Improving Liability Benchmarks and Pension Risk Management
Session 52: Update on Pre-Qualification and Continuing Education

Tuesday, October 18
Session 56: Education & Research Section Continental Breakfast
Session 62: The Long Run Volatility of Stocks Might Be Higher Than You Think
Session 81: Systemic Risk – Early Warning Indicators
Session 84: Presidential Luncheon
Session 89: How Regulation of Risk Can Affect Risk
Session 99: Rapid Retirement Research Initiative

Wednesday, October 19
Session 114: Investment Section Hot Breakfast – Statistical Arbitrage Is Not Arbitrage
Session 125: Actuarial Efficiency in Modeling and Valuation
Session 132: Looming Demographic Trends and Their Investment Implications
Session 147: ERM – Challenging Old Paradigms – Considering the Human Element

Note:  I was the pension representative on the annual meeting planning committee this year.

Monday, October 10, 2011

Caught between the rock (of plunging equities) and the hard place (of plunging discount rates)

The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $134 billion during September, from a deficit of approximately $378 billion as of August 31, 2011, to $512 billion as of September 30, according to new figures from Mercer. This deficit corresponds to an aggregate funded ratio of 72% as of September 30, compared to a funded ratio of 79% at August 31, 2011. [...] "The end of September marks the largest deficit since we have been tracking this information," said Jonathan Barry, a partner in Mercer's Retirement Risk and Finance business.