From the (e)Mailbox

I’ve enjoyed producing nearly 780 blog posts during the last 4-5 years or so on a variety of pension-related issues. We often get comments and/or questions from the public regarding what’s been produced. I respect people who are willing to share their views, while in many cases challenging our thoughts. It is certainly a great way for me to continue to learn and hopefully the audience does, too.

As an example, I received this comment yesterday. Russ, “promises” i.e. pensions would have been much less under CDI. This individual clearly understands that we at Ryan ALM espouse using a cash flow driven investing (CDI) approach to meeting near-term benefit payments. I have to believe that this individual feels that our bond exposure would somehow reduce the pension plan’s ability to achieve the return on asset assumption (ROA). That isn’t necessarily true, as most pension plans have exposure to fixed income and cash. According to P&I’s annual asset allocation survey, corporate, public, and multiemployer plans had fixed income exposure as of September 30, 2019 of 47.5%, 21.1%, and 35.5%, respectively.

What we suggest is converting the current bond exposure that is highly interest-rate sensitive to a CDI portfolio that matches and funds (secures) benefit payments chronologically from next month’s to ideally ten years out. This CDI portfolio, which we call a Liability Beta Portfolio (LBP), is invested in investment grade corporate bonds, as opposed to a diversified bond portfolio geared to the Barclays Agg. Our portfolio currently has a yield of roughly 3.5% versus the Agg’s yield at 1.5%. This significant yield advantage actually improves the plan’s ability to meet the ROA objective, although we believe that securing the benefits should be the primary objective in managing a plan. If a plan’s investment policy statement (IPS) provides for exposure to high yield, these bonds can be used in support of the LBP, too, which further enhances the portfolio’s yield advantage and ability to achieve the ROA.

Thanks for the comment, and please keep them coming!

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