Pension plans have to take a more "back to basics" approach to meet their obligations, a former state treasurer turned money manager told an audience of public fund sponsors.
Sponsors have been coasting on the high returns posted by the equity and bond markets during the 1980s, and which will not be repeated in the 1990s, said Anthony Meeker, former state treasurer of Oregon, and now a vice president of Spears, Benzak, Salomon & Farrell, New York.
Speaking to the annual meeting of the National Association of State Treasurers, Mr. Meeker said funds have to emphasize active management of their stock and bond portfolios, rather than merely increase allocations to other asset classes they expect to perform better.
Mr. Meeker compared plan sponsors to the pelicans of Monterey, Calif., that became so used to feeding off the local fish canneries that, when the plants shut down, they had forgotten how to fish.
"Just like those pelicans, everybody has become a little lazy - and that includes the policy-makers," said Mr. Meeker. Legislators, trustees and boards of directors have come to take the returns of the 1980s for granted and that will require a reality check soon, he said.
"They got fat, dumb and happy on those double-digit returns," said Mr. Meeker. "We have to go back to the basics and have a good understanding of what's going on with the markets."
Many of these pension funds have developed interest rate assumptions based on the '80s returns, said Mr. Meeker. That gives a false impression that the plans are well funded and it sends a message to the policy-makers to expect those rates in the future, he said. He cited a study by the Council of State Governments that shows 23 state pension funds polled had earnings expectations for 1994 ranging from 7.5% to 9.25%, with a mean expectation of 8.22%.
"Obviously if we depend on the 80s as our norm, we are going to be sadly mistaken," said Mr. Meeker. He produced historical charts showing that, over a 192-year span, long-term interest rates were below the levels they showed during the 1980s in 91% of the years, and stock market returns also were below the 1980s levels for most of the market's history.
"The first order of business is to be very factual with all the people involved and give them a history lesson," said Mr. Meeker. Sponsors must re-examine their earnings assumptions and get the message through to the policy-makers, he added.
The second order of business is to engage in more active management of stocks and bonds and become more focused on the total return, he said. Index funds have their place, but to depend on them is to depend on markets that are not going to perform up to their previous levels, he said.
Pension funds are seeking higher rates of return in areas such as derivatives, emerging markets, leveraged buy-outs and real estate, said Mr. Meeker. But very few pension funds have exposures beyond 5% in those classes, which won't help them.
One audience member proposed that switching to defined contribution plans is a simple answer, but Mr. Meeker countered the problems are magnified when sponsors have to educate their employees to make investment decisions.