Despite the deal to rescue the plan, do you think that eventually a market-based, 401(k)-like investment plan will replace this pension?
I hope that we can save it. All parties need to work hard toward maintaining the defined benefit plan.
Let’s take a step back to talk about how a defined benefit pension plan works. What happens is that an employer has agreed or promised to pay a benefit to the employee. This is based on an assumed rate of return. How that number is arrived at is called actuarial science, but it is really guesswork.
It is common sense. Typically, a pension plan will promise that it can earn 8 percent, which requires some doing (for context, the 10-year U.S. government bond yields a little over 2 percent). If its investments don’t earn 8 percent, the plan faces an actuarial deficit.
Then, if people live longer than expected, you are in a bigger hole. And if your costs go up, you have a bigger deficit still. So, everything has to go right for these defined benefit pension plans to work. If anything goes wrong, you have a big problem. The longer it goes without being fixed, the bigger the problem becomes — because that’s how compound interest works.
What changes would you recommend to the pension system operations?
I would suggest fewer “alternative” investments like vineyards, raw land, big houses in Hawaii — assets without readily available quotes. I would probably not be interested in holding those for very long.
In the past, you have warned that public pension debt is a ticking time bomb for cities and states. Overall, have things become better or worse?
Worse. It is a huge problem. It is the worst kind of problem because it gets much worse as time passes. Einstein is credited with calling compound interest the eighth wonder of the world. In this case, compound interest works against you. It is a nightmare.
Warren Buffett said earlier this year that money managers who charge exorbitant fees for underwhelming stock market results are responsible for troubled public employee pension funds. Is he right, and was that a factor in the Dallas Police and Fire Pension System’s problems?
Yes, I suspect, but do not know in this case. I have heard people say the more you pay, the less you get. That may apply here. What is generally clear for every investor, however, is that any kind of fee — management, trading, etc. — hurts performance.
Would you recommend that the new board take steps to hold the prior Dallas Police and Fire Pension System Board accountable, and if so, what would that look like?
I believe it is worth exploring. And if there was evidence of criminality, then yes.
This Q&A was conducted, edited and condensed by Dallas Morning News editorial writer Jim Mitchell. Email: email@example.com.
Frederick E. “Shad” Rowe is a general partner with Greenbrier Partners. Email: shadRowe@gmail.com
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