By Martin L. Leibowitz
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This section examines the return dimension. The "returns" from representative pension liabilities, that is, the changes in the present value of future benefits, are compared with returns from the S&P 500 and the Salomon Brothers BIG Index. Again there are some surprising results. While the asset returns of both classes have performed well over the six-and-onequarter-year period January 1, 1980 to March 31, 1986, the return on the liabilities also has been extremely high. In fact, the liability returns from the long-duration active-lives liability schedule far exceed the stellar performance of both the stock and bond A Perspectiz9e on Asset Allocation markets.
In fact, the liability returns from the long-duration active-lives liability schedule far exceed the stellar performance of both the stock and bond A Perspectiz9e on Asset Allocation markets. More concretely, the true economic surplus for many pension funds has actually shrunk, even though asset performance has forged ahead at a historic pace. Market Returns and Durations As a first step, it might be worthwhile to review the historical returns on the Salomon Brothers BIG Index. Figure 16 depicts monthly returns by fixed-income Corporate Bond Index 1980 Through 411186 1981 1982 1983 1984 1985 1986' Cumulative Returns Figure 16.
On the other hand, a fund in a deficit position finds itself under the pressure of a long-term earnings rate shortfall, that is, a certain increment beyond current market rates must be earned over the long term for complete funding to be achieved with the assets in hand. Therefore, the short-term measure of surplus status clearly has an important long-term implication in terms of the required earnings rate. The final section of this analysis illustrates how these earnings rate cushions may be computed and shows how they have changed under recent market movements.
A New Perspective on Asset Allocation by Martin L. Leibowitz