I was disappointed to read your Nov. 28 editorial, "FASB's new reality." While you make a lot of good points about new accounting rules being necessary, I think you extended your argument too far by implicitly recommending corporate DB plans adopt "more conservative asset allocations."
The facts simply do not support the case that the current equity biased long-term strategic asset allocations used by most companies have had anything substantive to do with the current pension crisis or distortions in accounting results. To the contrary, those equity biased allocations have resulted in the U.S. having the best funded private retirement system in the world and the returns generated over the past 50 years have greatly lessened the burden to taxpayers of future retirement costs. The current "crisis" is narrowly focused in a few industries where managements promised more in benefits than could reasonably be delivered under any investment scenario.
While the theories of liability management and liability defeasance have been promoted by academics and actuaries, I think it would be helpful if your publication would better present the risks and lower returns delivered by that strategy. In essence, the academic/actuary recommendations would shift the DB asset allocation toward the insurance industry investment model, which historically has produced substantially lower returns without lowering risk (as we saw in that industry a few years ago). DB liabilities are very long term in nature and so equities are a natural investment for helping sponsors meet their obligations — we know that equities outperformed bonds 90% of the time for all rolling 10-year periods over the last 70 years! Driving plan sponsors to bonds will ensure return shortfalls, weaken U.S. stock markets and rapidly accelerate the termination of DB plans for America's retirees. And, since the supply of long corporate and Treasury bonds represents less than a quarter of pension liabilities, it would be impossible to implement.
As the manager of a well-funded plan, I agree that more realistic accounting and more transparency is needed, but not a change that drives our DB pension plans to a sub-optimal investment strategy.
John H. Myers
President and CEO