Pension Alert – ROA/TSY10 Gap is Narrowest in Decades

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

We’ve just published a Pension Alert that highlights the fact that rising bond yields have closed the gap between the 10-year Treasury Note and the average public fund Return on Asset assumption (ROA) to its narrowest margin in decades. This should be exciting news for the plan sponsor and asset consulting communities, and it should lead to greater exposure to fixed income. As Ron Ryan points out in his “Alert”, a pension fund can achieve roughly 72% of the ROA through an allocation to investment-grade fixed income. How comforting it is for plan sponsors to know that utilizing fixed income to a greater extent significantly reduces the variability of their potential outcomes, as bonds have a much lower standard deviation than do equities and equity-like products.

If the US Federal Reserve is true to its word, US interest rates are likely to continue to rise, with the Federal Funds Rate likely elevating above 5% during this rising rate cycle. As Ron points out, we are huge proponents of using a Cash Flow Matching strategy in lieu of an active total return seeking fixed income mandate which further reduces the uncertainty of achieving a plan’s objective of securing the promised benefits with modest cost and prudent risk. It has been a long time coming, but fixed income is back, and plan sponsors would be wise to use it to a greater extent. Enjoy Ron’s piece, as it is quite inciteful.

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