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Actuarial Agony: Falling Interest Rates and the Plight of Pension Fund Managers

By March 5, 2020 No Comments

Private equity helps matters, but track records of outperformance don’t sway actuaries.

Falling interest rates are pushing down the expected return on assets (EROA) at pension funds, an unwanted development for all managers and especially aggravating, perhaps, for those who have historically been able to outperform expectations. That was among the takeaways from a recent NeuGroup pension roundtable.

Blame it on the actuaries. The pension fund manager at a major media company maintained an EROA of 7.5% over the last few years. Despite the fund outperforming relevant benchmarks, the EROA will soon move to 7.25% based on advice from actuaries concerned about long-term forecasts. “They just don’t care,” he said of his track record.

Several other participants acknowledged that their funds’ EROAs, too, had either dropped recently or likely will soon.

Private equity provides respite. The executive from a major pharmaceutical company agreed that actuaries appear set on lower EROAs, regardless of track records. She noted that her pension’s EROA currently rests at 8% but will likely fall to the high 7s in the next year or two. “Private equity is the only way we’ve been able to maintain it that high, and it’s why we have such a meaningful allocation to it,” she said.

Another participant said the sizable portion of his fund’s portfolio devoted to private assets, around 20%, enables it to support a higher EROA. Still another noted that “our private equity and venture capital [managers] are using a 11.25% long-term return, which helps, versus 8.25% for equities.”

The pharma exec noted a similar allocation, pointing out, however, that private assets are difficult to manage from an operational standpoint, given the cash flow and year-end accounting. “It’s a big commitment,” she said.

Priorities blur. A roundtable member noted that the question for the group is whether EROA is based just on capital market assumptions and employee allocations, or does income statement impact play a greater role. “Is the pressure to keep EROAs up from management?” he asked.

“Yes,” the group responded in unison.

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Ted Howard

Author Ted Howard

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