The SWAN Strategy

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

I believe that Pension America would be well served by adopting the SWAN strategy. These majestic birds embody a serenity that anyone would appreciate that has to deal with the uncertainty of the capital markets and the damage that they can create for plan sponsors of defined benefit pension plans. I have to believe that the asset consultants who serve these plan sponsors would also appreciate the SWAN strategy that enhances the probability of success while dramatically minimizing the volatility around potential outcomes.

What is the SWAN strategy? Simply put, it is a “Sleep Well At Night” strategy that Ron Ryan and Ryan ALM, Inc. (Cash Flow Marching) have been espousing for decades. How comforting would it be for the plan sponsor and their advisor(s) to know that no matter what happens in the markets- good, bad, and/or ugly -, the necessary liquidity has been secured to meet the promises to their plan participants for some prescribed period of time whether that be the next 5-, 7-, 10- years or more. Furthermore, in this period of great uncertainty due to rising US interest rates fueled by inflationary pressures, wouldn’t it be incredibly reassuring that the SWAN strategy isn’t impacted by changes in US interest rates, as a Cash Flow Matching strategy carefully funds (secures) the future value of benefits and expenses, which are not interest rate sensitive.

With so many benefits to help one sleep like a baby, why is CFM not being used more often? With bond yields up significantly, why aren’t pension plans adjusting their risk profiles to create an environment with a higher probability of success and less uncertainty? As plan sponsors have moved significantly more assets into alternatives, why haven’t they adopted a bifurcated approach to asset allocation that creates a liquidity bucket and a growth bucket instead of placing all their eggs in one bucket with a singular focus on the ROA? During periods of great uncertainty, such as the one we are currently living through, liquidity can become difficult to find, as all assets seem to correlate to 1. Having a bifurcated approach (liquidity assets and growth assets) to asset allocation ensures that benefits and expenses have been secured chronologically for a certain period of time (i.e. 5 to 10 years) until the allocation is exhausted.

Managing a pension plan should be like operating an insurance company or lottery system. You have an obligation (liability) that has been promised. Fund that liability with certainty and don’t rely on the markets and all of the uncertainty that comes with that to accomplish your objective. You will Sleep Well At Night (SWAN)!

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