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

Thank you, Ian Toner, Verus CIO, who is quoted in a P&I article stating that “illiquidity is a risk, not a premium”. I couldn’t agree more! This notion that you get rewarded for reducing liquidity is silly! Pension plan management is all about cash flows – asset and liability. You need liquidity to meet the promises (benefits).

The incredible movement into alternatives is screwing up that relationship. As I’ve stated many times in my nearly 1,700 blog posts (RyanALM.com), it is time to adopt a new approach to asset allocation. Bifurcate the pension assets into liquidity and growth buckets. If you desire to place significant bets in alternatives, at least the liquidity bucket (hopefully a cash flow matching (CFM) strategy) will ensure that your current liquidity needs are being met with certainty.

One doesn’t even need to explore illiquidity in alternatives to understand that there is no premium return for taking on less liquid investments. Just observe the outperformance of the R1000 versus the R2000 since the inception (1984). Large caps are dominating. Where’s the small cap illiquidity premium of 1% that is built into so many asset allocation models?

Let’s get back to pension basics. You’ve made a promise to a participant. The objective should be to SECURE that promise at a reasonable cost and with prudent risk. It has never been about generating the highest return. All that strategy ensures is volatility!