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

FINALLY!!!

Yesterday, there appeared a P&I article with the headline: “Ohio State Teachers says beating peers isn’t the point — paying benefits is”

YESSSSS! The only reason that a defined benefit pension plan exists is to fund a promise given to the participant. Managing a pension plan isn’t about achieving an ROA or beating a hybrid total fund index or eclipsing the performance of a peer group (silly concept). It is truly only about SECURING the liquidity necessary to match and fund benefits (and expenses) when they come due!

The pursuit of a return objective has only guaranteed volatility and NOT success. That is volatility of returns, contributions, and funded status. It is time to get off the performance rollercoaster.

The higher U.S. interest rate environment is providing plan sponsors with a great opportunity to de-risk and enhance liquidity through cash flow matching (CFM), which is designed to secure the liability cash flows (benefits and expenses) through the careful matching of asset cash flows (principal and interest) from bonds. 

An opportunity such as this hasn’t existed since 2000, when the average pension plan was well-overfunded and contribution expenses well-contained. It has been 26-years since the first market crash of the aughts began and public pension funds have only clawed back to an average funded status of 88% (Milliman). They can’t afford another crash that will only lead to a deterioration in the funded status and an escalation in contributions.

No one knows when that next correction may be just around the corner. Given that reality, don’t leave your pension plan vulnerable to this uncertainty. Put in place today a CFM strategy that will SECURE the promised benefits with certainty (barring an IG default), while buying time for the return-seeking assets to wade through the next market crisis. The time to act is now and not after the next market correction.