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

US interest Rate moves have certainly impacted the capital markets in the last 15 months. The impact during 2022 was mostly negative as both bonds and stocks saw major declines in valuations. However, the current US interest rate environment is providing plan sponsors and their advisors with the opportunity to take risk out of their plans without giving up significant return.

We, at Ryan ALM, have produced our latest Pension Alert, which highlights the fact that A and BBB rated bonds have yields that can provide most of the return needed to meet the ROA objective. In fact, A rated corporate bonds produce 78.6% of the return, while BBB bonds produce 85% of the ROA goal.

Given that the US Federal Reserve is likely to increase rates another 25 bps today, there is a good chance that US interest rates will continue to rise providing the plan sponsor with an opportunity not seen since the late ’90s. Don’t waste this opportunity by continuing an asset allocation framework that has too much uncertainty. Use bond cash flows of interest and principal to SECURE the promised benefits chronologically. This will help stabilize the plan’s funded status and contribution expenses.