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

The title for this post came from a question that I got in reply to my recent post related to my election platform. I highlighted the following benefits of cash flow matching (CFM):

• Secure the promised benefits at low cost and with prudent risk,
• Dramatically improve the monthly liquidity to meet those promised benefits (and expenses) chronologically,
• Extend the investing horizon for the alpha assets,
• Eliminate interest rate risk for the CFM assets, as they are defeasing benefits that are future values,
• Keep the plan from forcing liquidity when selling assets to meet benefits is not advantageous,
• Significantly reduce the cost of those future promises effective on the day the portfolio is constructed, and
• Provide all of this at modest cost

As you can read, I used the word cost three times in my list of benefits, and they do actually mean two different things for me. When I mentioned that CFM can secure the promised benefits at low cost and with prudent risk, what we believe is the primary objective in managing a DB pension plan, I was referring to asset management fees. When I used cost in the seventh point on my list, I was also referring to the cost to manage the mandate. Unfortunately, our pension community has created a much more expensive investment management structure through the migration of significant assets to alternative products. Ryan ALM’s CFM strategy is priced at a level that supports our belief that pension management should be focused on securing benefits at low cost. Please reach out to us for our published fee schedule.

Further down the benefits list (point 6), I mentioned significantly reducing the cost of those future promises. In this case, I am speaking to the difference between the future value (FV) of benefits and the present value (PV) assets needed to fund those benefits. We are producing significant cost reduction in this higher interest rate environment. Now, finance students will say that this “cost reduction” is nothing more than the time value of money, and they wouldn’t be wrong. However, on the day that we construct a CFM portfolio we achieve that cost savings due to the benefits of investing in bonds. Someone striving for a 6.5% annual return (the plan’s ROA) over some period of time might be able to accomplish the same “savings” through a diversified asset allocation framework, but that annual pursuit of the 6.5% comes with great volatility and uncertainty. The sequencing of those annual returns can also create havoc in the pursuit of that objective.

So, I did use cost interchangeably. In one case, I wanted to highlight the low fees that we charge to manage a CFM mandate. In the other, it was the difference between the PV of assets and the FV of benefits being secured with certainty absent any defaults, which in the investment-grade universe occurs at <2/1,000 bonds annually (S&P study of the last 40-years).

We’d appreciate the opportunity to manage a slice of your pension plan’s assets so that you too can benefit from our ability to significantly reduce cost, whether I’m speaking about fees or future benefit payments. Keep the questions coming – thank you!