I am actuary in behalf of a frozen, salaried DB plan with 60 participants. The Plan offers unreduced retirement for persons who retire from active service after reaching age 62 and completing 20 years of service. For other actives (and terminated vested), an actuarial reduction applies if payments begins before age 65. The Plan also offers lump sum payments to about 2/3 of these participants on a minimum actuarial basis (though the immediate payment would be lump summed).

The Plan is currently underfunded (on whatever rationale basis you would like to postulate). The Plan's investment counselor is suggesting that once the Plan gets funded on a PPA 2006 basis, that the funded status can be maintained by immunizing the portfolio. I had always thought of immunization making sense for a large groups of pensions in a periodic payout status where the only contingentcy is
mortality.

In this particular situation, the patterns of distribution are unpredictable and leveraged by a few handfuls of participants. So, it may not be possible to maintain a 90% funded percentage. In addition, it would seem that by investing purely in fixed instruments, the plan would be foregoing investment opportunity and the bottom line is that aggregate contributions (at least in theory) would be higher.

Any comments on the counselor's investment recommendation? Am I overlooking the obvious?

I'm surprised to hear the term "immunization" associated with such a small group. If this investment counselor actually has something that will track PPA liabilities, I would be interested in talking to him. I just don't see how it's possible.

The word immunization was my word. Actually, what the investment counselor (she) was saying was that you could matchup assets and liabilities so they moved in tandem and so that once you were "fully funded," you'd always remain "fully funded." I thought, "Sounds wonderful, but since I'm from Missouri, I have to be shown. In particular, how liabilities emerge can not be predicted with any degree of confidence. Further, how can returning less investment reduce contributions when the scheme fails?" In short, I didn't believe it. Yet, I am reluctant to pooh pooh an idea until I have a firmer grasp of the situation. I.e., I allow for the possibility I could be wrong, though it hasn't happened in several minutes.

One hopes that we are not in a situation where the IA is explaining to the actuary "mathcing assets and liabilities". That should be your expertise. In general, matching or immunization works best when the group is large (duh, general actuarial priniciples). That does not exclude it from this situation, but caution is advised, especially since (it appears from your plan specs) the actual retirement age can impact the plan's liability. Might be prudent to mention that to the plan sponsor and/or the IA.

BTW, does this IA expect to reap some commission on any immunizing transaction?

I am immersed in overkill paradise with this small not-for-profit (Plan has $5 million in assets) that uses a fancy investment manager and big-time law and accounting firms. Over the past seven years, the Plan would have fared better had they put their money in a matress, and I'm not being the least bit facetious. Since the IA has done so poorly with money, I can't help wondering whether she is recommending the fixed income approach to protect her derriere or she is misguided or because there is some substance there. I doubt the substance answer.

Since I was recently brought into this overblown mess, I must tread lightly as I'm not sure yet where the politics lie. I have, however, articulated that the approach is not appropriate for the particular situation and the reasons why. I've also been sucessful at eliminating her participation at various plan design meetings.

I simply wanted some reassurance that I was not overlooking something that supports the IA's position.