Author Archives: russkamp

10.21.24
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ARPA Update as of October 18, 2024

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Major League baseball finally has the last two competitors for this year’s World Series. As a Mets’ fan, I would have appreciated a different outcome, but it was a surprisingly good season for the team from Flushing! Good luck to the Yankees and Dodgers.

With regard to ARPA and the PBGC’s effort to implement this important pension legislation, last week provided just a couple of updates for us to digest. There were no new applications submitted, approved or denied. The PBGC’s eFiling Portal remains temporarily closed at this time. There were also no new systems seeking to be added to the waitlist at this time.

There was one application withdrawn. PA Local 47 Bricklayers and Allied Craftsmen Pension Plan, a non-priority group plan, withdrew its initial application last week that was seeking $8.3 million for the 296 participants in the plan.

The last bit of activity to discuss relates to the repayment of excess SFA as a result of census corrections. Teamsters Local Union No. 52 Pension Fund became the 22nd plan to repay a portion of their SFA received. In the case of Local No. 52, they repaid $1.1 million, which represented 1.15% of their grant. The largest repayment to date has been the $126 million repaid by Central States (0.35% of grant). In terms of percentages, the Milk Industry Office Employees Pension Trust Fund returned 2.36% of their grant marking the high watermark, while Local Union No. 466 Painters, Decorators and Paperhangers Pension Plan, was asked to return only 0.11% of their reward.

Finally, US interest rates have risen significantly since the Fed’s first rate cut on September 18th, as highlighted in the graph below. The higher rates reduce the present value of those future benefit payments and helps to stretch the coverage period provided by the SFA.

10.16.24
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Milliman: Public Pension Funded Ratio at 82.8%

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Milliman recently released results for its Public Pension Funding Index (PPFI), which covers the nation’s 100 largest public defined benefit plans.

Positive equity market performance in September increased the Milliman 100 PPFI funded ratio from 82.0% at the end of August to 82.8% as of September 30, representing the highest level since March 31, 2022, prior to the Fed’s aggressive rate increases. The previous high-water mark stood at 82.7%. The improved funding for Milliman’s PPFI plans was driven by an estimated 1.4% aggregate return for September 2024 (9.4% for the YTD period). Total fund performance for these 100 public plans ranged from an estimated 0.7% to 2.1% for the month. As a result of the relatively strong performance, PPFI plans gained approximately $72 billion in MV during the latest month. The asset growth was offset by negative cash flow amounting to about $10 billion. It is estimated that the current asset shortfall relative to accrued liabilities is about $1.138 trillion as of September 30. 

In addition, it was reported that an additional 5 of the PPFI members had achieved a 90% or better funded status (34 plans have now eclipsed this level), while regrettably, 14 of the constituents remain at <60%. Given that changing US interest rates do not impact the calculation for pension liabilities under GASB accounting, which uses the ROA as the liability discount rate, the improvement in the collective funded status may be overstated, as US rates continued to decline throughout the third quarter following an upward trajectory to start the calendar year.

10.15.24
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We Are # 29 – WOW!

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

The  16th annual Mercer/CFA Institute Global Pension Index report was released on Oct. 15. I want to extend a big thank you to Mercer and the CFA for their collective effort to elevate retirement issues, while celebrating those countries who are getting it right. According to the survey, “the overall index value is based on three weighted sub-indices—adequacy (40%), sustainability (35%) and integrity (25%)—to measure each retirement income system. Adequacy looked at areas such as benefits, system design, savings and government support. Sustainability examined pension coverage, total assets, demography and other areas. Integrity encompassed regulation, governance and protection.” There are more than 50 indicators that support these three broad categories.

The United States was given a score of 60.4 (63 in 2023’s study), which placed our retirement readiness at 29 of 48 countries that were evaluated. That 29 is 7 spots lower than 2023’s rank. According to the Mercer CFA study, a score of 60.4 places us slightly below the average score (63.4) among those ranked and we were given a letter grade of C+. I don’t know about you but if I had scored a 60 (scale of 0-100) during my school days, my letter grade would have likely been an F. Based on how I feel that we are prepared as a nation, I think that an F is much more appropriate than a C+. What about you?

I’m not trying to pick on the U.S. retirement system, which scored 63.9 on adequacy, 58.4 on sustainability and 57.5 on integrity, with Integrity being the poorest ranking as it trailed the worldwide average score by >16 points at 74.1. Our retirement system was evaluated based on the Social Security system and voluntary private pensions, which may be job-related (DB or DC) or personal, such as an IRA. Other systems with comparable overall index values to the U.S. (60-65) included Colombia (63), Saudi Arabia (60.5) and Kazakhstan (64.0). I don’t know about you but being ranked among those countries doesn’t make me feel warm and fuzzy about our effort or achievement. Systems scoring the highest were the Netherlands (84.8), Iceland (83.4), Denmark (81.6), and Israel (80.2) – they were given an ‘A’ grade.

Anyone participating in our industry knows that can AND MUST do better. The loss of DB pension plans within the private sector is a very harmful trend. Leakage within DC plans makes them more like glorified savings accounts rather than retirement vehicles, and Social Security provides small relief for a majority of recipients. As I’ve uttered on many occasions, asking untrained individuals to fund, manage, and then disburse a “retirement benefit” without the financial means, investment skill, and a crystal ball to forecast longevity is just silly policy.

Mercer and the CFA institute recommended a series of potential reforms to improve the long-term success of the US retirement system. I just loved this one:

“Promoting higher labor force participation at older ages, which will increase the savings available for retirement and limit the continuing increase in the length of retirement;“

A truly amazing suggestion – if you never retire then you don’t have to worry about whether or not your system will provide an adequate benefit! Problem solved! Many Americans would welcome the opportunity to extend their careers/employment opportunities, but some jobs require physical labor not easily done at more mature ages, while many American companies are anxious to rid themselves of higher priced and experienced talent in favor of younger workers (ageism?).

When I wrote about this survey last year, I’d hoped that the higher US interest rate environment would begin to improve outcomes for our workers whether their plans are a defined benefit or defined contribution offering. Unfortunately, current trends have US rates falling again. That just puts more pressure on DB plans and individual participants in DC plans and encourages (forces) everyone to take more risk. That development isn’t going to help next year’s score!

10.15.24
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ARPA Update as of October 11, 2024

By: Russ Kamp, Ryan ALM, Inc.

I hope that you enjoyed a wonderful holiday weekend. Autumn’s beautiful colors are finally present in the Northeast – enjoy those, too. As you will soon read, the PBGC had a busy week according to its latest update, so the extra day of rest was likely necessary.

The PBGC’s effort implementing the ARPA legislation continues in full swing. During the prior week there were three new applications received, two approved, another 2 withdrawn, and finally there were two more plans rebating excess SFA as a result of census corrections. Thankfully, there were no applications rejected. Lastly, there were no multiemployer plans seeking to be added to the waitlist (non-Priority Group members).

The plans receiving approval included Midwestern Teamsters Pension Plan and the Carpenters Pension Trust Fund – Detroit & Vicinity. The Carpenters nailed a $635.0 million SFA grant for its 22,576 participants, while the much smaller Midwestern Teamsters plan received $23.6 for 615 members. The PBGC has now awarded $68.6 billion in SFA grants to 94 pension systems.

Sheet Metal Workers’ Local No. 40 Pension Plan, Warehouse Employees Union Local 169 and Employers Joint Pension Plan, and Local 111 Pension Plan were granted the opportunity to submit requests for SFA grants. In the case of Local 111, they submitted a revised application. They are collectively seeking $124,7 million for 6,193 plan members. Good luck! In other news, the Teamsters Local 210 Affiliated Pension Plan and Local 111 Pension Plan withdrew their initial applications. These two funds were seeking $137.3 million collectively.

Finally, Milk Industry Office Employees Pension Trust Fund and Local 805 Pension and Retirement Plan rebated excess SFA grant money as a result of a census audit that confirmed overpayment. The Milk Industry delivered $193k (2.4% of the SFA received) to the PBGC, while Local 805 forked over $3.2 million (1.8% of the grant). Both represented a larger percentage of the SFA received than the previous transactions. At this time, 21 plans have returned $147.5 million in SFA and interest representing 0.37% of the grants received.

I hope that you find these updates useful. I remain incredibly bullish regarding the ARPA legislation and the positive impact that it continues to have on the American worker that earned this pension promise. Please don’t hesitate to reach out to Ryan ALM with any questions related to the legislation and what should be done to secure the promised benefits with the SFA grant assets.

10.11.24
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That’s comforting!

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

The Fed’s meeting notes from the September 17-18 FOMC have recently been released. Here are a few tidbits:

Some officials warned against lowering rates “too late or too little” because this risked harming the labor market.

At the same time, other officials said cutting “too soon or too much” might stall or reverse progress on inflation.

Here’s my favorite:

Officials also don’t seem in agreement over how much downward pressure the current level of the Fed’s benchmark rate was putting on demand.

I have an idea, why don’t we just have each member of the Federal Reserve’s board of governors stick their finger in the air and see which way the economic winds are blowing. It may be just as effective as what we currently seem to be getting.

Given that the economy continues to hum along with annual GDP growth of roughly 3% and “full employment” at 4.1%, I’d suggest that having a Fed Funds Rate at 5.25%-5.50% wasn’t too constraining, if constraining at all. We’ve highlighted in this blog on many occasions the fact that US rates had been historically higher for extended periods in which both the economy and markets (equities) performed exceptionally well – see the 1990’s as one example.

Furthermore, as we’ve also highlighted, there is a conflict between current fiscal and monetary policy, as the fiscal 2024 federal deficit came in at $1.8 trillion or about $400 billion greater than the anticipated deficit at the beginning of the year. That $400 billion is significant extra stimulus that leads directly to greater demand for goods and services. How likely is it that the fiscal deficit for 2025 will be any smaller?

I believe that there are many more uncertainties that could lead to higher inflation. The geopolitical risks that reside on multiple fronts seem to have been buried at this time. Any one of those conflicts – Russia/Ukraine, Israel/rest of the Middle East, and China/Taiwan – could produce inflationary pressures, even if it just results in the US increasing the federal budget deficit to support our allies.

If just sticking one’s finger in the air doesn’t help us solve our current confusion, there is always this strategy:

10.08.24
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Milliman: Corporate Pension Funding Weakens in September

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Milliman has released the latest results for the Milliman 100 Pension Funding Index (PFI). This index reviews the funding status each month of the top 100 U.S. corporate pension plans. The report indicated that the funded ratio declined to 102.4% at month-end from 102.6% at the end of August. Plan assets increased as a result of a 1.74% investment gain, but the discount rate declined by 0.14% to 4.96%. As a result, the growth in liabilities eclipsed asset growth leading to a $12 billion loss in funded surplus.

Assets for these combined plans now total $1.36 trillion as of September 30, while the projected benefit obligation is now $1.33 trillion giving these 100 corporate plans a $29 billion surplus. According to Zorast Wadia, author of the PFI, the current discount rate at 4.96% marks the first time since April 2023 that the rate hasn’t been >5.0%. However, so far in October we’ve witnessed a fairly significant move up in rates. If this trend continues, we could see the funded ratio for this index once again rising if the increase in rates doesn’t negatively impact the asset side of the pension equation.

10.08.24
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We Suggested That It Might Just Be Overbought

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Regular readers of this blog might recall that on September 5th we produced a post titled, “Overbought?” that suggested that bond investors had gotten ahead of themselves in anticipation of the Fed’s likely next move in rates. At that time, we highlighted that rates had moved rather dramatically already without any action by the Fed. Since May 31, 2024, US Treasury yields for both 2-year and 3-year maturities had fallen by >0.9% to 9/5. By almost any measure, US rates were not high based on long-term averages or restrictive.

Sure, relative to the historically low rates during Covid, US interest rates appeared inflated, but as I’ve pointed out in previous posts, in the decade of the 1990s, the average 10-year Treasury note yield was 6.52% ranging from a peak of 8.06% at the end of 1990 to a low of 4.65% in 1998. I mention the 1990s because it also produced one of the greatest equity market environments. Given that the current yield for the US 10-year Treasury note was only 3.74% at that point, I suggested that the present environment wasn’t too constraining. In fact, I suggested that the environment was fairly loose.

Well, as we all know, the US Federal Reserve slashed the Fed Funds Rate by 0.5% on September 18th (4.75%-5.0%). Did this action lead bond investors to plow additional assets into the market driving rates further down? NO! In fact, since the Fed’s initial rate cut, Treasury yields have risen across the yield curve with the exceptions being ultra-short Treasury bills. Furthermore, the yield curve is positively sloping from 5s to 20s.

Again, managing cash flow matching portfolios means that we don’t have to be in the interest rate guessing game, but we are all students of the markets. It was out thinking in early September that markets had gotten too far ahead of the Fed given that the US economy remained on steady footing, the labor market continued to be resilient, and inflation, at least sticky inflation, remained stubbornly high relative to the Fed’s target of 2%. Nothing has changed since then except that the US labor market seems to be gaining momentum, as jobs growth is at a nearly 6-month high and the unemployment rate has retreated to 4.1%.

There will be more gyrations in the movement of US interest rates. But anyone believing that the Fed and market participants were going to drive rates back to ridiculously low levels should probably reconsider that stance at this time.

10.07.24
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Ryan ALM, Inc. 3Q’24 Pension Monitor

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

We are pleased to share with you the Ryan ALM, Inc. Q3’24 pension monitor. This quarterly report compares different liability growth rates (based on a 12-year average duration) versus the asset growth rate for public, multiemployer, and corporate funds based on the P&I asset allocation survey of the top 1,000 plans which is updated annually each November.

With regard to Q3’24, Public Pension funds (4.9%) outperformed Corporate Pension plans (3.6%) by 1.3% net of liability growth, as public pension plans had a much greater exposure to US equities (21.9%) versus Corporates (12.6%). The S&P 500 continues to produce exceptionally strong returns in this uncertain environment. From a liability standpoint, the ASC 715 discount rates (+4.6%) marginally trailed liability growth for both public and multiemployer plans that operate under GASB accounting rules using the ROA.

Please don’t hesitate to reach out to us with any questions that you might have regarding this monitor.

10.07.24
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ARPA Update as of October 4, 2024

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Welcome to October. It is always a beautiful time of year in New Jersey.

With regard to the PBGC’s implementation of the ARPA legislation, there was some activity last week. After a short pause in accepting applications, the PBGC accepted two initial applications from two non-Priority Group members. Cement Masons Local No. 524 Pension Plan and the Roofers Local No. 75 Pension Plan, both Ohio-based, filed applications seeking $11.3 million combined in SFA for 486 plan participants. As a reminder, the PBGC has 120 days to act on those applications.

In addition to the 2 new applications, the PBGC recouped another $1.2 million in SFA overpayments due to census errors. This brings the repayment to of excess SFA to $144.1 million for 19 plans. The recovery of SFA amounts to 0.37% of the grant monies awarded. In other news, there were no applications approved, denied or withdrawn during the last week. There also were no funds seeking to be added to the waitlist.

As the chart above highlights, there are 110 funds yet to have applications approved. US Treasury yields are once again on the rise after a dramatic retreat as bond investors plowed into bonds anticipating very aggressive rate cuts by the Federal Reserve. Higher rates reduce the PV cost of those FV payments of benefits and expenses. A defeasement strategy significantly reduces interest rate risk as FVs are not interest sensitive. As we’ve discussed on many occasions, using a cash flow matching strategy to meet those benefits and expenses reduces the uncertainty associated with a traditional benchmark relative fixed income product. We are happy to discuss this subject in far greater detail.

10.04.24
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What Will Their Performance Be In About 11 years?

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

How comforting would it be for both plan sponsors and their advisors to know how a particular strategy is going to perform over some defined period of time? I would think that having that knowledge would be quite comforting, at least as a “core” holding. Do you think that a core fixed income manager running a relative return strategy versus the Bloomberg Barclays Aggregate Index could tell you how that portfolio will perform in the next 10 1/2 years? No. Ryan ALM can with a very high degree of certainty. How’s that? Well, cash flow matching (CFM) of asset cash flows to liability cash flows locks in that relationship on the day that the portfolio is constructed. Ryan ALM views risk as the uncertainty of achieving the objective. If the true pension objective is to fund benefits and expenses in a cost-efficient manner with prudent risk, then our CFM model will be the lowest risk portfolio.

We were awarded a CFM assignment earlier this year. Our task was/is to defease the future grant payments for this foundation. On the day the portfolio was built, we were able to defease $165.1 million in FV grant payments for only $118.8 million, locking in savings (difference between FV and PV of the liability cash flows) of $46.3 million equal to 28.0% of those future grant payments. That’s fairly substantial. The YTM on that day was 5.19% and the duration was 5.92 years.

Earlier this week, we provided an update for the client through our monthly reporting. The current Liability Beta Portfolio (the name that we’ve given to our CFM optimization process) has the same FV of grant payments. On a market value basis, the portfolio is now worth $129 million, and the PV of those future grant payments is $126 million. But despite the change in market value due to falling interest rates, the cost savings are still -$46.3 million. The YTM has fallen to 4.31%, but that doesn’t change the initial relationship of asset cash flows to liability cash flows. That is the beauty of CFM.

Now, let me ask you, do you think that a core fixed income manager running a relative return portfolio can lay claim to the same facts? Absolutely, not! They may have benefitted in the most recent short run due to falling interest rates, but that would clearly depend on multiple decisions/factors, including the duration of the portfolio, changes in credit spreads, the shape of the yield curve, the allocation among corporates, Treasuries, agencies, and other bonds, etc. Let’s not discount the direction of future interest rate movements and the impact those changes may have on a bond strategy. In reality, the core fixed income manager has no idea how that portfolio will perform between now and March 31, 2035.

Furthermore, will they provide the necessary liquidity to meet those grant payments or benefits and expenses, if it were a DB pension? Not likely. With a yield to maturity of 4.31% and a market value of assets of $129.3 million, they will produce income of roughly $5.57 million/year. The first year’s grant payments are forecast to be $9.7 million. Our portfolio is designed to meet every $ of that grant payment. The relative return manager will be forced to liquidate a portion of their portfolio in order to meet all of the payments. What if rates have risen at that point. Forcing liquidity in that environment will result in locking in a loss. That’s not comforting.

CFM portfolios provide the client with the certainty of cash flows when they are needed. There is no forced selling, unlike the relative return manager that might be forced to sell in a market that isn’t conducive to trading. Furthermore, a CFM mandate locks in the cost savings on day 1. The assets not used to meet those FV payments, can now be managed more aggressively since they benefit from more time and aren’t going to be used to meet liability cash flows.

Asset allocation strategies should be adapted from a single basket approach to one that uses two baskets – liquidity and growth. The liquidity bucket will house a defeased bond portfolio to meet all the cash flow requirements and the remainder of the assets will migrate into the growth bucket where they can now grow unencumbered. You’ll know on day 1 how the CFM portfolio is going to perform. Now all you have to worry about are those growth assets, but you’ll have plenty of time to deal with any challenges presented.