Dealing With Market Ups and Downs

Article

To LAFPP Members:

In light of recent market volatility, it’s only natural to be concerned about your personal financial circumstances – especially your retirement plan.  We know that each of you has a significant personal interest in the health and long-term stability of the Fire and Police Pension Plan.  Most of the time we rarely question its stability.  But during periods in which the stock market falls sharply, we sometimes need a reminder that our Plan’s assets and the investment strategy the LAFPP Board has put in place is specifically designed to benefit from a rising stock market – such as we have enjoyed throughout the 2009 to 2014 period, and to cope with the periodic declines that regularly occur.  While it is certainly true that market declines are unwelcome and represent hurdles we must overcome in the future to keep our Plan’s funding strong, the Board’s investment strategy contains multiple elements to mitigate the effect of those declines.  These include: 

  • A highly diversified portfolio that is not solely dependent on the stock market but includes bonds, real estate, private equity, commodities and other assets. 
  • A continuous monitoring program by the Board and staff to measure and place boundaries around the Fund’s dependence on stocks. Every three months the Board conducts an intensive review of the asset allocation of the Plan’s assets and fund performance and risk over multiple time periods.
  • A rebalancing policy that encourages the gradual sale of stocks or other holdings when they exceed the Board’s upper boundary and begin to add exposure when values have fallen below long-term targets.
  • A policy that avoids exposing large amounts of the Plan’s assets to high risk short-term trading strategies in favor of high quality long-term investments.
  • A periodic asset/liability study that carefully monitors the cohesion between the benefits the Plan is obligated to pay to our pensioners and the long-term investment strategies in place.  The last asset/liability study the Board had conducted by our independent consultant concluded that our Plan’s funding level was “unquestionably strong” relative to most other public pension plans.
  • A frequent examination of the Plan’s ability to ensure sufficient cash is on hand or readily available to pay benefits due today for the years to come.

The most important point of this message is that this short-term decline in the stock market – even though sudden, significant and certainly unwelcome – is one of many that the Plan has encountered since it was first established in 1899 and does not threaten the long-term financial stability of our Plan or the Plan’s ability to pay benefits to LAFPP members.