CFA Conference: M. Barton Waring

M. Barton Waring is former global chief investment officer for investment strategy and policy at Barclays Global Investors. He serves on the editorial boards of the Financial Analysts Journal, the Journal of Portfolio Management, and the Journal of Investing. Mr. Waring recent book is Pension Finance: Putting the Risks and Costs of Defined Benefit Plans Back under Your Control, upon which this presentation is based.

My session notes follow.  As always, these are at-the-time notes.  I make no guaranty as to their accuracy or completeness.

  • Pension finance: where actuarial science meets economics.
  • Conventional pension actuarial accounting (book value) has a high degree of distortion (market value accounting is required).
  • Many potential accrual methods, and none conveys anything like “real” information.
  • Central question: What is the right discount rate?
  • The accounting will always follow the economics.
  • If the economics are managed, the actuarial and accounting versions will follow.
  • How big is contribution volatility?
  • Only 3 liabilities are of economic interest: full economic liability; present value of future benefit payments; and the “benefit security liability.”
  • The idea: to amortize the unpaid portion of a debt through some form of payment function.
  • Many payment functions in use for actuarial normal cost.
  • Pension expense and contributions should equate economically.
  • Why discount at the expected return on assets?
  • Risk: Investors don’t “get” expected returns even though they are long-term investors (risk doesn’t go down over time — it increases).
  • Risk to wealth increases over time (a “bad” result is more likely).
  • You can’t leave pension results to “luck.”
  • That means higher contributions earlier (always lower later).
  • Using the “risk-free” rate nearly eliminates “surprises.”
  • Policy problem: who will pay the shortfall (overdue contributions)?
  • Discounting with the expected return on assets isn’t cheaper — it sets up a slow motion bankruptcy.
  • See Bill Sharpe video — The State Pension Actuary.


  • Pensions need to use actual realized returns.
  • Pensions are the only entities that do things differently.
  • That long-term investors really get the expected return is a myth.
  • A single pension objective, properly specified, can control almost all pension risk (other than demographic risks).
  • In sum, we need tough love to save underfunded plans (“good” benefits worth little ig the pension defaults).
  • In other words, if you price benefits at $.50 on the dollar, you aren’t going to have secure benefits.
  • The temptations to delay and avoid are extraordinary.
  • Rising rates would benefit pension plans.
  • It’s simple: if you don’t get the “expected return” over a significant period of time, you’re in big trouble.
  • The situation is dire — it’s late in the game; the problem needs to be fixed.

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