This made me think about our chosen field of endeavor, where there are often widely divergent views on approaches and methods. This past week saw Steve Campisi compete against Mark Elliott on the value of including the "income effect" in a fixed income attribution model. And next month I have the pleasure of taking on Carl Bacon on the subject of time- versus money-weighted returns. Our Battle Royale has been a standard part of our annual Performance Measurement, Attribution & Risk conference since the event's initiation, and it serves to show how not only are there different views, but that they often engender strong passion on the part of the participants. And while these events have never resulted in profanity-laced name calling, such as what appears in some of the Lost comments, participants can clearly see how opinions can be strongly held and well entrenched. These events, as with the Lost commentary, provide the opportunity to gain additional insights into controversial topics.
Standards are great, but it's good that not everything is standardized, so that firms and institutions have the opportunity to select the approach(es) they feel best suit their needs.
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Let's not forgot another highlight of PMAR VIII: Ron Ryan's scathing rebuke regarding the trillions (yes, that's with a "T") of unfunded pension liabilities that are facing the beneficiaries of both state and corporate defined benefit plans. My home state of Connecticut alone has a $9 billion budget deficit from a state pension fund that has only 55 cents on the dollar to fund what they owe to state workers. How did we get in such a mess? By following the "common wisdom."
ReplyDeleteRon pointed out that at the height of the equity market in 1999 the average pension plan was funded at 160% of what was required. Fast forward to today and you find that many corporate and government plans are severely underfunded, typically holding only 40% to 80% of what is needed. So the burning question is this: "Why didn't plan sponsors follow the procedures long used by payout agencies such as the state Lotteries which simply defease these obligations by purchasing Treasury bonds to match the liability outflows?" The answer is simple: this wise advice went against the "conventional wisdom" which was touted by its many eloquent defenders.
And so we have years like 2008 when equity markets tank, liabilities soar and the typical "70/30" pension portfolios fall 15% - 50% below their liabilities in a single year! We knew everything we know now back in the mid 1990s, and the precedent for "liability driven investment" had already been in force by insurance companies for decades. Unfortunately, plan sponsors and the many investment managers were acting like return maximizers and asset gatherers instead of like the fiduciaries they were supposed to be. And all the debating in the world failed to help us find the truth.
This is the problem with debates: the truth often plays "second fiddle" to the persuasiveness and oratory of the debaters, and the pursuit of winning often crowds out the pursuit of truth. Add our very human bias towards listening for viewpoints with which we already agree, and we see the very high hurdle that we face in trying to change the common viewpoint. In the end, I believe that truth prevails, but persistence and patience are required. In the end, it's worth it.
Steve, thanks for pointing this out. Yes, the absence of liability management and/or failure to take care of ones liabilities is proving to be a huge problem in both the private and public sectors.
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