I am thrilled to announce that I’ve joined Ryan ALM. I’ve had the pleasure of working closely with Ron Ryan on a number of initiatives during the last 6+ years. I believe that Ron is one of the few true visionaries in our industry, and I am very much looking forward to continuing to learn from him. There are many challenges facing the retirement industry today and it will take a “back to the future” mentality to overcome them. At Ryan ALM we have the tools to help plan sponsors and their consultants navigate these difficult waters. Don’t hesitate to reach out to us if you desire smoother sailing.

Here is the press release announcing my arrival:

PRESS RELEASE

Ryan ALM hires Russ Kamp as Managing Director

July 29, 2019 – Ryan ALM, Inc., a well-known asset/liability manager, custom liability index, and ASC 715 discount rate provider has hired Russell D. Kamp, formerly head of Kamp Consulting Solutions, as Managing Director. Russ will be involved in all aspects of the Ryan ALM business, but his primary focus will be to head sales/marketing and client service.

Ron Ryan, founder of Ryan ALM, reports, “Ryan ALM is honored and excited to have Russ Kamp join us. In his capacity as managing director, Russ will oversee our marketing efforts and be directly involved with all aspects of our business. I know of few people with the investment knowledge, acumen, and refinement as Russ. He will serve us and our clients well.”

Russ Kamp responded, “This is a great opportunity to work with Ryan ALM and especially Ron Ryan, with whom I’ve worked closely for the past 6 years. I believe in the Ryan ALM mission statement to secure benefits in a cost-effective manner with low risk. The financial models here are unique in the pension world (Liability Beta Portfolio and Custom Liability Index) and provide a true synergistic value to any client and their consultant. As a former consultant who appreciates the challenges that plan sponsors face today, I understand the value added that Ryan ALM brings to every plan sponsor.”

Mr. Kamp was formerly founder of Kamp Consulting Solutions (KCS), a full-service asset/liability consulting firm. Prior to KCS, Russ was Director, Asset Management at Two Sigma Investments, as well as the Global CEO at Invesco’s IQS Group (Quantitative Strategies). He is a frequent speaker at industry seminars, where he is often the chairperson, and a prolific author of pension articles and blogs.

Russ, welcome aboard!

The Committee for a Responsible Federal Budget produced a blog the other day. Here is the first paragraph –

“The House Ways & Means Committee is considering pension reform legislation that CBO estimates will add $64 billion to deficits over the next ten years and could ultimately cost substantially more because of a relatively gimmicky loan approach that allows pensions to pay back only interest for the next 29 years and requires a massive balloon payment in year 30.”

The fact that the bill is proposing ONLY a $64 billion loan package to be spent over 10 years seems a drop in the bucket given the estimated federal fiscal year budget deficit (10/1/18 to 9/30/19) for 2019, which is estimated to be $1.09 trillion, and 2020’s budget shortfall that will grow an estimated 1% on top of that figure.

Would they rather have these pension systems fail and then witness nearly 1.3 million American plan participants fall onto the social safety net?  Furthermore, Cheiron (pension actuary) has calculated that 111 of the 114 pension systems tested in support of the original Butch Lewis Act legislation would be able to make the balloon payment after all was said and done. If so, the “cost” is dramatically lower than the estimated $64 billion. The roughly $6.4 billion to be spent annually to sure up these plans represents 6/10s of 1 basis point per annum.

How about we take care of the people who were promised a benefit and are now facing the growing likelihood that this benefit will be lost or severely reduced through no fault of their own and instead have the Committee for a Responsible Federal Budget tackle the more significant areas of our budget that that seem to have costs spiraling out of control.

Kentucky Governor Matt Bevin has signed legislation to reform pensions in the hope that it eases the financial burden for quasi-government agencies, such as mental health agencies, rape crisis centers, local health departments, etc. The legislation calls for the freezing of contributions from these agencies for another year, allowing them to basically pay half of what they owe until the piper calls in 2020.  That won’t be a pleasant experience when those bills come due!

Another key element of the legislation permits these organizations to withdraw from the state’s pension system and pay off their debt, with interest, over 30 years. The Kentucky pension system is currently the worst funded in the nation at 16%, and the deferment of contributions will likely negatively impact the ongoing funding.  Shockingly, these agencies can move anyone hired after 2013 out of the defined benefit plan and into a defined contribution plan (I can’t imagine that action not being tested in court).

The state’s 118 quasi-governmental agencies can start leaving the Kentucky Retirement System in April. If they do, they have to provide other options for their employees, such as a 401(k), but here’s the rub, they don’t have to continue contributing money toward their retirement! Given that directive do you think that any will?

P&I reported that CalSTRS generated a 6.8% return for their fiscal year ending June 30, 2019, which exceeded their benchmark’s 6.5% return. Unfortunately, this is no cause for celebration, as CalSTRS funded ratio was only 65.5% as of June 30, 2018. Given the funding deficit, a small level of outperformance will not chip away at the significant underfunding.

CalSTRS has a plan in place that will provide them with a 70% chance of getting to full-funding in 2046, but a significant market dislocation (or two or three) during that timeframe will obviously adversely impact their ability to achieve this objective, as approximately 2/3rds of their benefit payments come from investment returns. Unfortunately, CalSTRS portfolio will have to generate outsized returns or contribute significantly more to the fund to whittle away at the deficit. There is already considerable risk being assumed with a 7% investment target. Contributing more may be an even more difficult hurdle as the state currently contributes more than 9% of total teacher payroll into the fund.

Senator Sherrod Brown (D-OH) and 26 other Democrat Senators, including some of the former members of the now defunct Joint Select Committee on the Solvency of Multiemployer Pensions, have reintroduced pension legislation to tackle the evolving pension crisis. The legislation was filed on Wednesday, which was the same day that the House passed H.R. 397.

The passage of H.R. 397 in the House was expected given the Democrat majority, but the 29 Republicans that joined in support provides a glimmer of hope that Senator Brown’s and the other co-sponsors’ efforts will not be futile, although likely difficult.

As we’ve reported on numerous occasions kickers of the proverbial pension can down the road have finally run out of terrain.  Although Republican Senators will be striving for a more bipartisan compromise, important elements must be maintained in order for this legislation to be successful. Importantly, no action should be taken to potentially harm currently healthy plans by increasing their costs, such as PBGC premiums or mandating mark-to-market discount rates.

In addition, troubled plans should be given an opportunity to borrow low-cost funds provided through the proposed Pension Rehabilitation Administration (PRA) at the current proposed rate of 25 basis points above the prevailing 30-year U.S. Treasury yield. Any meaningful change in the proposed yield, such as that which was proposed by Congressman Roe (R-TN), will adversely impact the plan’s ability to repay the loan principal in 30 years. Failure to do so increases the odds that these pension systems will collapse forcing them (and the beneficiaries) onto the PBGC, which has a benefit threshold that would severely reduce the average pension benefit.

The House passed the H.R. 397 legislation Wednesday in a 264-169 vote aimed a helping stabilize multiemployer pension plans in hopes of mitigating the looming pension crisis.

Importantly, twenty-nine Republicans — nine of whom co-sponsored the legislation — joined Democrats in voting for the measure.

Getting this legislation through the Republican-controlled Senate will be the next and most challenging hurdle. Stay tuned.

I want to provide a quick update for you regarding H.R. 397. I just heard from Congressman Gottheimer’s Legislative Assistant, Zach Eckstein that the “Butch Lewis Act” will be up for a vote on the floor before 8 pm this evening.  A last minute “Hail Mary” amendment by Congressman Roe (R – TN) will be taken up before the vote on 397.

The amendment by Congressman Roe sets the loan interest rates at 5% per annum for the first 5 years and 9% per annum thereafter. This is another game by some in Congress to kill this important bill. Currently, language in the Bill calls for the interest rate to be 25 bps above the prevailing 30-year Treasury (2.58% as of today).

We will update you later this evening on today’s vote.

As mentioned yesterday, I am participating at the Opal Public Fund Summit in Newport. The conference is well attended and the panels/presenters have been very good.  Yesterday’s sessions provided a heavy dose of product related conversation, including equities, fixed income, real estate, real assets, private equity, and private debt.

As I sat through each session I began to think about the types of questions that I’d want to ask if I were a plan sponsor for one of these large public fund entities. It is great that plan sponsors are in attendance, as they are tasked with a very important job in allocating plan assets with the goal to cobble together a combination that will achieve the return on asset assumption over some longer time frame. However, as I sat there I didn’t hear any of the points being made or questions being asked that would provide me with the information necessary to confidently remain in an asset class or allocate to a new one.

So as I thought about this some more, here are the questions that I’d want addressed:

1. What are the long-term expectations for return, risk, and correlation for your asset class? Have those numbers deviated recently and why?
2. Where are we in the investing cycle?
3. How have flows been within your asset class? Are there any capacity issues to be concerned about?
4. Anything new and exciting to report?
5. What keeps you awake at night?
6. What should plan sponsors be asking that they haven’t been?
7. How would a recession likely impact your asset class?
8. Have you begun thinking about the 2020 presidential election and how it might impact your asset class?
9. Are there investment opportunities outside the U.S. in your asset class? Do they have similar return, risk, and correlation expectations?
10. Does the median manager outperform their benchmark after fees in your asset class? If not, shouldn’t a low-cost index fund be considered as an option?

I’m sure that I’m missing some important and relevant questions, but before making any asset allocation changes I’d want to be comfortable that I wasn’t buying yesterday’s news.

Ron Ryan and I are presently spending a few days in Newport, RI at the Opal Public Funds Summit East. The sessions on day one were outstanding, and the audience was very engaged. One theme, in particular, continues to echo through the conference facility related to the inclusion of traditional fixed income in their pension plan’s asset allocation.

The question to ask at this time given this low-interest-rate environment is whether fixed income is a performance asset, an anchor to windward (given the extended bull market for U.S. stocks), a source of cash flow, or none of the above? We would posit that the primary role for fixed income is as a source of cash flow to meet net benefit payments (after contributions) through a cash flow matching strategy.

Through this approach, a portion of your portfolio will be transitioned (most likely your existing fixed income) to a “beta” portfolio where the objective is to match each benefit payment, net of any contributions, in chronological order from nearest out as far as the asset allocation will permit. By using this approach a plan would benefit by having no interest rate risk in the beta portfolio since we are funding future values, better liquidity to meet those future benefit payments, and an extended investing horizon allowing for the greater use of alternatives in the alpha portfolio, which will now have time to capture the liquidity premium that exists. As a reminder, the “alpha” portfolio should look similar to a traditional asset allocation minus investment grade fixed income that is highly correlated to the plan’s liabilities.

The performance objective of the plan’s asset allocation will now become that plan’s specific liabilities and no longer the return on asset assumption (ROA). As the plan’s alpha portfolio outperforms liability growth, “excess” assets should be ported to the beta bucket extending the cash flow matching of benefits and further de-risking the plan toward full funding. We would be happy to discuss this asset allocation technique in further detail.

Here is another interesting and insightful article from the folks at Spring Valley Asset Management. They ask the question: When should one rebalance their portfolio? It is a question that allocators rarely ask prospective investment managers. However, when one rebalances a portfolio can have an incredible impact on the realized and future performance of their underlying strategies. This Study demonstrates how two managers running identical investment strategies but rebalancing on different dates can achieve substantially different performance.

They attribute this result to path dependency, or as they call it “rebalancing luck.” It does not represent any additional investment skill of one manager over another. They show that differences in performance over 1-year horizons can eclipse an astounding 20%. In addition, over their whole 17-year sample, the difference between the best and worst performing rebalance date resulted in a total return differential of 250%! They go on to provide a novel approach called partitioning to reduce path dependency and realize much more consistent results. The approach also allows them to produce much more accurate return expectations, which should be a critical input into an asset allocation process. The implications of this paper cannot be overstated, and I encourage you to have a read yourselves!