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

Ryan ALM’s Chairman, Ron Ryan, shares his thoughts regarding negative cash flows for DB pension plans and what a potential solution could be to mitigate the impact.

As a reminder, pension plans are designed to have the last $ in the plan meet the last promised benefit payment. They aren’t designed to be an inheritance for the last few participants in the plan. As a result, plans that fall into negative cash flow need to be careful to reduce significant drawdowns that can be harmful to the long-term viability of the plan.

Importantly, Ron discusses the use of Cash Flow Matching (CFM) to bring an element of certainty to the management of pension plans, which are better funded today than at any time since 1999. He states that to avoid another repeat of the spiking contributions dilemma pensions should install a CFM strategy as the core portfolio.

As a reminder, CFM was the dominant investment strategy, previously known as Dedication, for pension plans in the 1970s and 1980s when pensions were fully funded. CFM is a best fit for the true pension objective since it is designed to fully fund net liability cash flows in a cost-efficient manner. Bonds are the only asset class with certainty of its future cash flows (interest income and principal payments at maturity). No forced selling to meet ongoing liability cash flows when markets might not provide the necessary liquidity in a cost effective way.