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

Good morning. I’m currently in Chicago in the midst of several meetings. Yesterday’s meetings were outstanding. As you’d expect, the conversations were centered on DB pension plans and the opportunity to de-risk through a Cash Flow Matching strategy (CFM) in today’s economic environment. The line of questioning that I received from each of my meeting hosts was great. However, there does seem to be a misconception on when and how to use CFM as a de-risking tool. Most believe that you engage CFM for only the front-end of the yield curve, while others think that CFM is only useful when a plan is at or near full funding. Yes, both of those implementations are useful, but that represents a small sampling of when and how to implement CFM. For instance:

As a plan sponsor you need to make sure that you have the liquidity necessary to meet you monthly benefits (and expenses). Do you have a liquidity policy established that clearly defines the source(s) of liquidity or are you scurrying around each month sweeping dividends, interest, and if lucky, capital distributions from your alternative portfolio? Unfortunately, most plan sponsors do not have a formal liquidity policy as part of their Investment Policy Statement (IPS). CFM ensures that the necessary liquidity is available every month of the assignment. There is not forced selling!

Do you currently have a core fixed income allocation? According to a P&I asset allocation survey, public pension plans have an average 18.9% in public fixed income. How are you managing that interest rate risk, which remains the greatest risk for an actively managed fixed income portfolio? As an industry, we enjoyed the benefits of a nearly four decades decline in U.S. interest rates beginning in 1982. However, the prior 28-years witnessed rising rates. Who knows if the current rise in rates is a blip or the start of another extended upward trend? CFM defeases future benefit payments which are not interest rate sensitive. A $2,000 payment next month or 10-years from now is $2,000 whether rates rise or fall. As a result, CFM mitigates interest rate risk.

As you have sought potentially greater returns from a move into alternatives and private investments, not only has the available liquidity dried up, but you need a longer time horizon for those investments to mature and produce the expected outcome. Have you created a bridge within your plan’s asset allocation that will mitigate normal market gyrations? A 10-year CFM allocation will not only provide your plan with the necessary monthly liquidity, but it is essentially a bridge over volatile periods as it is the sole source of liquidity allowing the “alpha” assets to just grow and grow. That 10-year program coincides nicely with many of the lock-ins for alternative strategies.

There has been improvement in the funded status of public pension plans. According to Milliman, as of June 30, 2025, the average funded ratio for the constituents in their top 100 public pension index is now 82.9%, which is the highest level since December 2021. That’s terrific to see. Don’t you want to preserve that level of funding and the contribution expenses that coincide with that level? Riding the rollercoaster of performance can’t be comforting. Given what appears to be excessive valuations within equity markets and great uncertainty as it relates to the economic environment, are you willing to let your current exposures just ride? By allocating to a CFM program, you stabilize a portion of your plan’s funded status and the contributions associated with those Retired Lives Liability. Bringing a level of certainty to a very uncertain process should be a desirable goal for all plan sponsors and their advisors.

If I engage a CFM mandate, don’t I negatively impact my plan’s ability to meet the return objective (ROA) that we have established? NO! The Ryan ALM CFM portfolio will be heavily skewed to investment-grade corporate bonds (most portfolios are 100% corporates) that enjoy a significant premium yield relative to Treasuries and agencies. As mentioned previously, public pension plans already have an exposure to fixed income. That exposure is already included in the ROA calculation. By substituting a higher yielding CFM portfolio for a lower yielding core fixed income program benchmarked to the Aggregate index, you are enhancing the plan’s ability to achieve the ROA while also eliminating interest rate risk. A win-win in my book!

So, given these facts, how much should I allocate to a CFM mandate? The answer is predicated on many factors, including the plan’s current funded status, the ability to contribute, whether or not the plan is in a negative cash flow situation, the Board’s risk appetite, the current ROA, and others. Given that all pension systems’ liabilities are unique, there is no one correct answer. At Ryan ALM, we are happy to provide a detailed analysis on what could be done and at what cost to the plan. We do this analysis for free. When can we do yours?