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

I sincerely appreciated the opportunity to speak at the IFEBP’s Construction Industry Benefits Conference in Las Vegas yesterday. My topic: Investing Benefit Plan Assets. I focused much of my attention on the current economic environment, capital market expectations, as well as asset allocation, both traditional views and an alternative approach focused on the plan’s liabilities to drive asset allocation decisions. I was very pleased with the response from the attendees, who were engaged throughout the 75 minutes that I got to spend with them, as they asked one good question after another.

What was particularly noteworthy to me was the considerable interest from the trustees related to “de-risking” their plans in this environment. They understood that funded status for many DB plans had improved, and that the US interest rate environment was providing opportunities not witnessed in decades, but they were frustrated because they didn’t know what to do. Some had heard about LDI, but that is like saying that they heard about equities, while others heard that de-risking was done using annuities. None of those in attendance had ever heard of Cash Flow Matching (CFM).

In one particular exchange, the trustee of this fairly large fund mentioned that their plan was 107.5% funded but they were concerned about de-risking because they wanted to be able to provide enhanced benefits at some point. The gentleman was incredibly excited to hear that de-risking a DB pension system isn’t an all or nothing proposition provided that you approach the issue appropriately. Corporate America has engaged in buyouts and buy-ins for quite some time now as they look to disengage from their DB plans through a pension risk transfer (PRT). Those initiatives can be related to a partial transfer of pension liabilities (Retired Lives) or they can be for the whole kit and kaboodle. But, once the contracts are signed, the plan sponsor often loses flexibility related to those liabilities and the assets that are matched against them.

Utilizing a CFM approach allows the plan sponsor to allocate whatever percentage of their assets to the program while maintaining complete control over the assets. That allocation decision should be predicated on the funded status of the plan. The flexibility of the implementation is one of the most attractive features related to CFM. Because the program uses the cash flows from investment grade bonds to match and fully fund the liability cash flows. These bonds can be sold and the program unwound without fear of penalty, which can occur with buyouts and buy-ins.

There is a great opportunity for the asset consulting industry to educate clients on the benefits of de-risking strategies. As a reminder, the primary objective in managing a DB plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is not riding the asset allocation rollercoaster through up and down markets. DB plans were once managed similarly to that of insurance companies and lottery systems that focused on the future value obligation and funded it appropriately. They knew that current asset allocation approaches didn’t guarantee funding success, but they did lead to greater volatility and uncertainty.

If a DB plan terminates, no one wins, except perhaps the insurance company that is in the business to make money. The plan sponsor loses their ability to manage a labor force from retention to retirement. The plan participant, especially those still in the workforce, lose the ability to accrue greater benefits, while asset consultants, actuaries, plan administrators, investment managers, custodians, and any other entity that touches a plan, lose a client. We’ve witnessed thousands upon thousands of plans freeze and terminate throughout the last four decades or so.

Taking some risk off the table doesn’t diminish anyone’s role. It likely keeps them in the pension game longer, while securing those promises that plan participants are banking on. Let’s commit to providing the pension community with all of the information from which they can make informed decisions. De-risking may not be for every plan, but it certainly makes sense for most. We can certainly provide you with a series of benefits that result from engaging in this activity starting with a funding cost savings (reduction) of around 50%. Don’t hesitate to reach out to us. We are happy to provide you with the research resources (RyanALM.com) necessary to inform your clients.