Broker Check
Don’t Be a Test Pilot

Don’t Be a Test Pilot

| October 02, 2019

Don’t Be a Test Pilot

LFG Marketing | October 2019

To “push the envelope” means testing limits and trying out new, often radical ideas. The phrase has its origins in mathematics and engineering, where the “envelope” is the boundary or limit of a design. In the 1950s, test pilots like Chuck Yeager became famous for pushing the envelope with experimental aircraft, by breaking the sound barrier or flying at ultra-high altitudes.

Pushing the envelope can be risky business, because if you exceed the limits of a design, there’s often a crash. Yeager survived several crashes, but others were not so fortunate.

Today, some financial “pilots” are pushing the envelope of pension engineering, seeing if they can keep underfunded retirement plans from going down in flames.

Pushing the Pension Envelope

A pension has two principal “engineering groups” that contribute to its design: actuaries and investment managers. Actuaries make projections on the number of retirees who will be eligible for benefits and how long they will be paid. Investment managers determine the capital contribution and rate of return needed to provide these benefits. Pension engineering is not static; as conditions change, actuaries and investment managers make adjustments to their projections.

On the actuarial side, pension plans have had to adjust to longer life spans. For the investment managers, the biggest changes come from underperforming investments and deficient contributions.

Lower-than-anticipated returns or higher-than-anticipated payments mean the sponsor of the pension (a state government, a municipality, a corporation) should make additional contributions to cover the projected shortfall and keep the pension fully funded. But since a one-year deficit may not cause current retirees to lose benefits, and because there may not be funds available to make an additional contribution, regulators give pension managers some latitude to restore the deficit through other methods. Typically, this means projecting higher returns.

If higher returns are achieved, problem solved. But if investment returns are again below projections, the pension needs either a larger infusion of capital, or it must project an even higher return from investments.

Today, many pensions, even those operated by governmental units, are woefully under-funded, and the sponsors don’t have the

cash to make up the difference. Consequently, investment managers have to push the envelope in their portfolios.

An August 2019 Wall Street Journal article, “Public Pension Funds Miss Their Mark,” says that “In hopes of reducing their unfunded liabilities, pensions have pushed further into riskier, less-traditional investments over the past decade.” Yet in terms of results, “Public pensions lagged behind their projected returns this year.”

When pensions don’t have enough money to meet future obligations, trying to cover the deficit with riskier, less-traditional investments is definitely pushing the envelope. And since this approach has been used before in the private sector – and ended badly – some observers see a crash coming.

Insight from Failure

A plane crash is a failure, either in design or pilot error. But from failure, aeronautic engineers can learn what not to do in the future. In a similar way, individuals may glean some insights from pensions that have pushed the envelope.

Your retirement accumulations are analogous to a one-person pension; your savings are intended to provide a retirement income for as long as you live. Just like the actuary and investment manager, you can make projections for longevity and rates of return to calculate what you can take as income and how long it will last. And just like an under-funded pension, you could push the envelope of your retirement income by projecting higher returns. But should you push the envelope? Maybe not.

It’s fair to assume a pension manager has a higher level of investment expertise than you do. If professional investment managers struggle to meet their most optimistic projections, is it reasonable to think you can successfully push the envelope and receive higher returns? Probably not.

There’s another caution to consider: Pushing the envelope has a psychological component. Success can convince you to continue pushing – until you crash.

Studies have found that individuals who built their retirement savings during years of above-average market returns tend to think these results are the norm. John Coumarianos, a former analyst at Morningstar and writer, says, “(P)eople who retire at bull-market peaks have a higher chance of running out of money. They wrongly assume big returns will continue to pile up – and then they lose a big chunk of cash when bear markets arrive.”

It’s Insurance and Debt, Too

Pushing the envelope isn’t just about investment risk. A decision to neglect insurance – on you, your income, your assets – is pushing the financial envelope. Because the tragedies covered by insurance (a premature death, a disabling accident, a lawsuit, a fire) are relatively infrequent, some households try to minimize or eliminate insurance. If nothing happens (no fatality, accident, judgment, car wreck) the decision is self-affirming (“See, I told you we could get by without it.”), and it becomes comfortable to go without insurance or continue under-insuring.

Perhaps the greatest envelope-pushing involves debt. National economies, governmental units, businesses and individuals continue to increase their indebtedness, pushing the envelope of what their budgets can handle. Some sober-minded observers see a crash looming, yet institutions and individuals continue to find creative ways to increase lending and borrowing.

Are You Pushing the Envelope of Your Personal Finances?

From a distance, most of us can see that none of this will end well. Under-funded pensions will eventually fail. A tragedy will strike, and there will be no insurance to replace or restore what’s been lost or damaged. And overwhelming debt will drive households to bankruptcy. At some point, we have to stop pushing the envelope, and take steps to ensure our security.

But often what we see in others we don’t see in ourselves. Like an investor who thinks above-average returns will continue for the rest of his life, we may have pushed the envelope so often we are no longer concerned about a crash. To accurately assess our risks, we may want to get input from a financial professional, and strategies that limit exposure and preserve assets.


Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 244 Blvd of the Allies, Pittsburgh, PA 15222 (412) 391-6700. PAS is an indirect, wholly-owned subsidiary of Guardian. This firm is not an affiliate or subsidiary of PAS. 2019-87106 EXP. 09/2021  This newsletter is prepared by an independent third party for distribution by your Representative(s). Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice. Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information should be relied upon when coordinated with individual professional advice. Links to other sites are for your convenience in locating related information and services. The Representative(s) does not maintain these other sites and has no control over the organizations that maintain the sites or the information, products or services these organizations provide. The Representative(s) expressly disclaims any responsibility for the content, the accuracy of the information or the quality of products or services provided by the organizations that maintain these sites. The Representative(s) does not recommend or endorse these organizations or their products or services in any way. We have not reviewed or approved the above referenced publications nor recommend or endorse them in any way. The title of this newsletter should in no way be construed that the strategies/information in these articles are guaranteed to be successful. The reader should discuss any financial strategies presented in this newsletter with a licensed financial professional.