By: Russ Kamp, CEO, Ryan ALM, Inc.

I’ve been a trustee for a non-profit’s foundation fund. I haven’t been a Trustee for a defined benefit pension plan, but I’ve spent nearly 44-years in the pension industry as both a consultant and investment advisor working with many plan sponsors of varying sizes and challenges. As anyone who follows this blog knows, Ryan ALM, Inc. and I are huge advocates for DB pension plans. We believe that it is critical for the success of our retirement industry that DB pension plans remain at the core of everyone’s retirement preparedness. Regrettably, that is becoming less likely for most. However, if today I were a trustee/plan sponsor of a DB pension plan, private, public, or multiemployer, this would be my wish list:

• I would like to have more CERTAINTY in managing my DB pension fund, since all my fund’s investments are subject to the whims of the markets.
• I would like to have the necessary LIQUIDITY to meet my plan’s benefits every month without having to force a sale of a security or sweep income from higher growth strategies (dividends and capital distributions) that serve my fund better if they are reinvested.
• I would like to have a longer investing HORIZON for my growth (alpha) assets, so that the probability of achieving the strategy’s desired outcome is greatly enhanced.
• I don’t want to have to guess where interest rates are going, which impact both assets (bond strategies) and liabilities (promised benefits). Bonds should be used for their CASH FLOWS of interest and principal at maturity.
• I don’t want to pay high fees without the promise of delivery.
• I’d like to have a more stable funded status/funded ratio.
• I want annual contribution expenses to be more consistent, so that those who fund my plan continue to support the mission.
• I want my pension fund to perform in line with expectations so that I don’t have to establish multiple tiers that disadvantage a subset of my fund’s participants.
• I want my fund to be sustainable, even though I might believe it is perpetual.

Are My Desired Outcomes Unreasonable?

Absolutely, not! However, there is only one way to my wish list. I must retain a Cash Flow Matching (CFM) strategy, that when implemented will provide the necessary liquidity, extend the investing horizon, eliminate interest rate risk, bring an element of certainty to a very uncertain process, AND stabilize both contribution expenses and the funded status for that portion of the portfolio using CFM.

Is there another strategy outside of an expensive annuity that can create similar outcomes? NO! I believe that the primary objective in managing a DB plan is to SECURE the promised benefits at a reasonable (low) cost and with prudent risk. CFM does that. Striving to achieve a return on asset (ROA) through various fixed income, equity, and alternative strategies comes with great uncertainty and volatility.  The proverbial rollercoaster of outcomes. The CFM allocation should be driven by my plan’s funded status. The higher the funded status, the greater the allocation to CFM, and the more certainty my fund will enjoy.

I believe that since every plan needs liquidity, EVERY DB pension fund should use CFM as the core holding. I want to sleep well at night, and I believe that CFM provides me with that opportunity. What do you think?