While the current Income, Income & Growth and Growth funds provided by Merrill Lynch have served Members reasonably well in the past, they do not match the fundamental, underlying goal of Members. That goal is to maximize the probability that a Member will successfully fulfill the future obligations of the prepaid funeral contracts to which they are a party on an inflation-adjusted basis, so that they can avoid having to cover any shortfalls out-of-pocket.
PIA believes that the best way for Members to achieve this goal is through liability-driven investing (LDI). The gist of LDI involves investing in assets that will generate a return sufficient to satisfy relatively certain future liabilities. For years, many large pension plans have employed LDI to meet such liabilities which, in their case, are pension payments that must be made to many workers over long periods of time far into the future. LDI assesses future known liabilities first and then currently invests in assets that are reasonably certain (but not guaranteed) to satisfy those liabilities.
LDI is ideal for the MEP™ for at least two good reasons.
First, the future liabilities of prepaid funeral contracts – wholesale funeral costs plus an inflation rate - can be predicted with reasonable accuracy. Data show that inflation rates specific to funeral costs have significantly exceeded the Consumer Price Index over the last 30 years. PIA’s model portfolios, which have been built exclusively for the MEP™, were created to generate returns to help fill the significant gap between the lower inflation rate of the Consumer Price Index and the higher inflation rate of wholesale funeral costs. This gap can grow significantly over time and threaten the achievement of a Member’s fundamental, underlying business goal: fulfilling his/her future obligations for prepaid contracts on an inflation-adjusted basis without the need to cover any shortfalls out-of-pocket. PIA’s model portfolios are designed to keep up with the higher inflation of wholesale funeral costs – no matter how long a contract owner may live.
Second, the future known liabilities of the MEP™ are substantially short-term in nature: 80% of prepaid funeral contracts are performed within 5 years and 95% within 10 years. The fact that these time periods are relatively short term means that relatively less risky investments need to be made in order to (hopefully) successfully satisfy a Member’s prepaid funeral contract liabilities. Since relatively less risk is involved in satisfying a Member’s liabilities, the investments necessary to meet those liabilities can be relatively less risky. There is no reason to take unnecessary risk by investing in too great an allocation of stocks in any PIA model portfolio.
That’s why PIA’s menu of liability-driven model portfolios is comprised primarily of short and intermediate, high quality fixed-income investments with only a modest exposure to global stocks. Each portfolio is low-cost, and diversifies risk broadly and deeply. These portfolios have been designed specifically to help Members achieve their fundamental, underlying business goal – and avoid the risk of failing to do so.