By: Russ Kamp, Managing Director, Ryan ALM, Inc.
The US interest rate environment might be creating challenges for the investing community, but it is providing wonderful opportunities for pension plan sponsors who want to SECURE the promised benefits with little risk. Yes, that scenario is very possible. Why get caught up in all the market’s gyrations? Why sit on the edge of your desk chair trying to decipher every word of Fed Governor Powell’s utterances to Congress? We, at Ryan ALM, can remove so much uncertainty from managing a pension plan because bonds are once again beautiful!
Yesterday, we constructed a new portfolio for a prospective client that had a YTM of 6.03%! This analysis was for a 30-year cash flow-matching (CFM) portfolio that generated a YTM >6%. It wasn’t too long ago that the US 10-year Treasury note had a yield of < 0.6%! For pension plans, whether they be private, public, or union, striving to achieve a ROA of 6.75%-7.0%, we are able to get you most of the way to that objective through an optimization process that carefully matches asset cash flows with liability cash flows. Importantly, when you defease pension liabilities with bond cash flows you are eliminating interest rate risk for that portion of the portfolio since you are defeasing future values (FV) which are not interest rate sensitive.
Concerned about the Fed’s future action? Cash flow match today and sleep like a baby tonight! If you aren’t familiar with cash flow matching, it is a tried and true fixed-income strategy that has been used for decades in lottery systems and insurance companies. It was also used widely by pension plans around the globe until interest rates began to fall more than 4 decades ago. Please ask your consultant or reach out to us to provide you with the benefits of CFM. They are numerous and the current interest rate environment is wonderful, and it may get even better as Powell and his fellow FOMC board members ratchet rates higher!
Nothing like a safe investment. I bonds are 9% right now. There’s a 10k limit but perhaps pensions can have that lifted or put it in Series EE bonds.
Nothing like a safe investment!! Pensions need liquidity, so neither I bonds – too small – nor EE series bonds would fit the bill, but there’s nothing wrong with getting 6% from an investment-grade corporate bond. Time to take risks off the table. Let’s not repeat the failures of the past.