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

We hope that you are enjoying a wonderful summer season. Thanks for taking the time to visit our blog, where we’ve now produced >1,650 mostly pension-related posts.

I wanted to share the following email exchange from earlier this week. I received an email at 6:40 pm on Monday from a senior member of the actuarial community who is familiar with our work. He said that he had a client meeting on Wednesday and he was wondering if we could model some potential outcomes should the plan decide to take some risk off the table by engaging a cash flow matching strategy (CFM).

The actuary gave us the “net” liabilities (after contributions) for the next 10-years and then asked two questions. How far out into the future would $200 million in AUM cover? If the client preferred to defease the next 10-years of net liabilities, how much would that cost? We were happy to get this inquiry because we are always willing to be a resource for members of our industry, including plan sponsors, consultants, and actuaries.

We produced two CFM portfolios, which we call the Liability Beta Portfolio™ or LBP, in response to the two questions that had been posed. In the first case, the $200 million in AUM would provide the client with coverage of $225.8 million in future value (FV) liabilities through March 31, 2031 for a total cost of $196.3 million. Trying to defease the next 10-years of liabilities would cost the plan $334.8 million in AUM to defease $430 million in net liabilities.

As we’ve mentioned on many occasions, the annual cost savings to defease liabilities averages roughly 2%/year, but as the maturity of the program lengthens that cost savings becomes greater. We believe that providing the necessary liquidity with certainty is comforting for all involved. Not only is the liquidity available when needed, but the remaining assets not engaged in the CFM program can now grow unencumbered.

If you’d like to see how a CFM program could improve your plan’s liquidity with certainty, just provide us with the forecasted contributions, benefits, and expenses, and we’ll do the rest. Oh, and by the way, we got the analysis completed and to the actuary by 12:30 pm on Tuesday in plenty of time to allow him to prepare for his Wednesday meeting. Don’t be shy. We don’t charge for this review.