By: Ronald J. Ryan, CFA, Chairman, Ryan ALM, Inc.

Solution: Custom Liability Index (CLI)

Pension liabilities (benefit payments) are like snowflakes being quite different and unique for each plan sponsor due to each plan having a different labor force, salaries, mortality, plan amendments, colas, etc. Yet several pension plans use generic bond indexes (i.e. Aggregate, long corporate) as a proxy for their liabilities and as a benchmark for duration matching strategies, and even performance measurement. It is impossible for any generic bond index to replicate a pension plan’s liabilities. This inappropriate use of generic indexes could lead to erroneous duration matching and liability growth rate calculations.

The solution is a Custom Liability Index (CLI) that is based on the actuarial projections of each pension plan. The Ryan team designed the first CLI in 1991, as the proper pension fund benchmark. The CLI is one of the key products for Ryan ALM’s turnkey system. The CLI accurately calculates the term structure, net liabilities, interest rate sensitivity, and growth rate for each of our clients’ liability schedule.

Importantly, assets need to know what they are funding, which is the net liabilities after contributions that should be the first source to fund those liabilities. Unfortunately, actuaries do not calculate net liabilities, nor do they include contributions as future assets in the funded ratio and funded status. Once again, this could lead to improper asset allocation decisions. As a result, the CLI should be the first step in asset allocation, asset management, and performance measurement.