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Future Shock

Transaction U: Rigging Higher Ed for Smooth Sailing in a Perfect Storm

University Business, March 2013

Unpredictable high winds and rip currents catalyze rogue waves, sinking ships like the Andrea Gail inspiring the book and film The Perfect Storm. As the east coast now rebuilds from the devastation of Hurricane Sandy, many institutions are heading into another rogue wave that threatens the economic sustainability of higher ed.

In 2013, a preponderance of American colleges and universities will assume greater risk with leaner rewards as they set sail for the year ahead. Indeed, a perfect storm is building around a confluence of student, family, and campus debt, increased public and for-profit competition, the craven appetite of misguided regulators, and the sinking feeling that our retirement funds are significantly underfunded. It is no secret that the economic assumptions behind pension and Defined Benefits plans are underwater big time—those of us without a realistic post-recession plan must navigate like lost ships in the night searching for safer harbors.

As we peer over the horizon, one senses a palpable anxiety. The reality for many Americans is that both higher education and early retirement is beyond the financial reach of a new generation of could-be graduates—aspiring to take their place as responsible citizens of the world. In fact, Manchester-by-the-Sea in Massachusetts is no longer competing with Manchester, New Hampshire, but with Manchester, England and beyond.

Still, the American higher education system is the most coveted, copied, and recognized in the world. Post 9/11 notwithstanding, international students continue to flock to American universities and colleges—and what’s more is that overseas universities are applying for U.S. accreditation.

Meanwhile, institutional bond holders are increasingly nervous about schools dissolving before their very eyes as small colleges get caught up in the battle of amenities and outsized debt service with new residential commons, fitness centers, cyber cafes and other cool places for students to go.

The net result is a jittery higher education pension system that benefits from predictable risk and return expectations.

Despite these well-founded concerns, one senses a new way to get ahead of the next wave. We learned from BCG Terminal Funding Company’s Michael Devlin that many institutions are advised to retain risk and not phase it out. The smart money takes a proactive approach—a process that optimizes pension risk management and liability exposure to make the pension plan as stable and cost-effective as possible. After all, a 1 percent interest rate change in either direction could impact liability exposure by as much as 15 percent. Not understanding interest rate exposure, longevity of risk, and other factors can cost significant dollars. Simply put, why wait any longer for costs to go up?

Deal with it. Think about leaving a legacy of better pension risk management practices. With so many other competing priorities, institutions are rethinking how to manage pension plans, based on informed intuition and experience in calculating likely risk exposure.

Once the pension exposure is sized and managed, the baton is passed to the documents and processing partner, The Colbent Corporation. Their end of the transaction process is collecting, organizing, and disseminating volumes of participant data –a virtual one-stop hub for customized transaction services. The relay is complete when the typical university or college is freed up from paying fees for maintaining a money pit of a pension plan.

As the back office partner, Colbent provides customized transaction processing, secure data storage, and handles communications with the pension holders’ population. At the end of the process, both crews have also helped shape the client’s operating budget and long-term spending plan. Today, campus financial officers no longer need to figure out the crisis-prevention pension plan of attack on their own. During the stormiest of times, an upfront risk prevention investment pays off. These new higher ed processing agents provide a smart approach to pension risk management.