Author Archives: russkamp

06.03.24
by

ARPA Update as of May 31, 2024

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

Welcome to June and the latest update on the PBGC’s effort to implement the ARPA pension legislation. There isn’t much to report, but I’m happy to mention that two plans received approval of the SFA applications.

Maryland Race Track Employees Pension Plan and the Radio, Television and Recording Arts Pension Plan were granted approval for SFA totaling $89.6 million. Both plans were categorized as non-priority funds. In the case of the Maryland Race Trace Employees, they are galloping toward receiving $26.7 million for the 1,407 plan participants, while the Radio, Television and Recording Arts will no longer have to perform for their benefits as they will get $62.8 million for the plan’s 516 participants or roughly $121 K per participant.

The only other reported activity had the Carpenters Pension Trust Fund – Detroit & Vicinity pulling its application that was seeking $595.5 for more than 22,000 members of the plan. This non-priority plan from Troy, MI, pulled its initial application. There were no new applications filed or rejected. No plans were added to the waitlist and no pension funds returned excess SFA assets.

June looks to be shaping up as a busy month for the PBGC, as there are nine funds that have approval dates this month, including the Bakery and Confectionery Union and Industry International Pension Fund, that is seeking nearly $3.2 billion in SFA. In total, the nine funds are hoping to gather more than $6 billion in grants for 233,845 participants. Six of the nine funds are waiting to get approval from the PBGC on revised applications. Good luck.

06.03.24
by

Pension Problem – Earning the ROA

By: Ron Ryan, CEO, Ryan ALM, Inc.

We are pleased to share with you the latest research from Ron Ryan, who provides a unique perspective on asset allocation and the important role that Cash Flow Matching (CFM) can play in helping plan sponsors achieve the elusive ROA. How would you like another 50 bps with little risk? Using CFM to defease pension liabilities through a corporate bond exposure (primarily A/BBB+) could enhance the fixed income return versus the Aggregate Index that is heavily skewed to lower yielding government securities. In addition to the enhanced return, the CFM strategy provides the necessary liquidity to meet ongoing benefits and expenses.

We are acknowledged experts in Cash Flow Matching. We regularly provide a free analysis on what a CFM strategy could do for you and your plan as it relates to the critically important management of assets/liabilities. Don’t hesitate to reach out to us. We look forward to being a resource for you.

05.30.24
by

A Little History Lesson is in Order

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

I continue to be surprised by the constant droning that US interest rates are too high and financial conditions are too tight. Compared to what? If the reference point is Covid-19 induced levels then you are probably right, but if the comparison is to almost any other timeframe then those proclaiming that the sky is about to fall should refer to one of the greatest decades for equities in my lifetime – the 1990s. I think most investors would agree that the 1990s provided a nearly unprecedented investing environment. One in which the S&P 500 produced an 18.02% annualized performance.

Was the economic environment of the 1990s so much better than today’s? Heck no, but let’s take a closer look. 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. Given that the current yield for the US 10-year Treasury note is 4.56%, I’d suggest that the present environment isn’t too constraining. Furthermore, let’s look at the employment picture from the ’90s. If US rates aren’t high by 1990 standards, unemployment must have been very low. You’d be wrong if that was your guess. In fact, unemployment in the US ranged from 7.5% at the end of 1992 to a low of 4.2% in 1999. For the decade, we had to deal with an average of 5.75% unemployment. Today, we sit with a 3.9% unemployment rate. That level doesn’t seem too constraining, and initial unemployment claims remain quite modest.

So, current US interest rates and unemployment look attractive versus what we experienced during the ’90s. It must be that economic growth was incredibly robust to support such strong equity markets. Well, again you’d be wrong. Sure economic growth averaged 3.2% during the decade, but the Atlanta Fed’s GDPNow model is forecasting a 3.5% growth rate currently for Q2’24. This comes on the heels of a rather surprising 2023 growth rate. What else could have contributed to the 1990’s successful equity market performance that isn’t evident today? How about fiscal deficits? Perhaps the US annual deficit during the ’90s contributed significant stimulus which would have led to enhanced demand for goods and services?

I don’t think that was the case either, as the cumulative US fiscal deficit of $1.336 trillion during the 1990s, including surpluses in 1998 and 1999, is roughly $400 billion less than that which occurred in fiscal 2023 and what is predicted for 2024. Oh, my. The largest fiscal deficit during the 1990s was only $290 billion. That’s equivalent to about 2 months-worth today.

I’m confused, the 1990s produced an incredible equity market despite higher rates, higher unemployment, lower GDP growth, and little to no fiscal stimulus provided by deficit spending, yet today’s environment is constraining? Come, on. Inflation remains sticky. The American worker is enjoying (finally) some real wage growth and is gainfully employed. Rates are not too high by almost any reasonable comparison. US GDP growth is forecasted to be >3%. Where is the recession? Fiscal stimulus continues to be in direct conflict with the Fed’s monetary policy. Something that those investing during the 1990s didn’t need to worry about. Taken all together, is 2024’s environment something to be concerned about, especially relative to what transpired in the 1990s? Should the Fed be looking to reduce rates? I’ll be quite surprised if they come to that conclusion anytime soon.

05.29.24
by

What A Ride!

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

In 1971, Bread produced the song If. The song starts off with David Gates singing the lyrics, “if a picture paints a thousand words”. Looking at the graph below, I think that Bread and David could have used a number far greater than 1,000 to describe the impact that this picture might produce.

It never ceases to amaze me how momentum builds for an idea driving perceptions to depths or altitudes not supported by the underlying fundamentals. We see it so often in our markets whether discussing bonds, equities, or alternatives. In the case above, the “Street” became convinced that the US Federal Reserve was going to have to drive US interest rates down as our economy was about to collapse. A “please do something” cry could almost be heard from market participants who thrived on nearly four decades of Fed support. They were so accustomed to the Fed stepping in anytime that there was a wobble in the markets that it became part of the investment strategy.

It got so silly, that fixed income managers drove rates down substantially from the end of October to the end of 2023. In the process, they created an environment that was once again very “easy” and supportive of economic growth. But, that wasn’t the end of the story. I can recall a near unanimous expectation that there was going to be anywhere from 4-6 cuts in the Fed Funds Rate and perhaps more during 2024. We had analysts predicting 250 – 300 bps of rate cuts. Was the world ending?

I’ve produced more than 40 blog posts since March of 2022 that used the phrase “higher for longer” in describing an economic and inflationary environment that I felt was to robust for the Fed to reduce rates. Of course, there were many more posts in which I questioned the wisdom of the deflationary and lower rates crowd where I didn’t precisely utter those three words. Well, fortunately for pension America and the American worker, the US economy has held up in far greater fashion than predicted. The labor market remains fairly robust keeping Americans working and spending.

While inflation remains sticky and elevated, US rates have remained at decade highs providing defined benefit sponsors the opportunity to take substantial risk from the plan’s asset allocation framework through asset/liability strategies (read Cash Flow Matching) that secure the promises at substantially lower cost. As the chart above highlights, expectations for rate cuts have fallen from 4-6 or more to fewer than 2 at this point, as only a -31 bps decline is currently priced in. We’ve seen quite a repricing in 2024, and I suspect that we might need to see more, as “higher for longer” seems to be the approach being taken by the Fed.

While this is the case, plan sponsors would be wise to secure as many years of promised benefits as possible. Plan sponsors and their advisors let 2000 come and go without securing the benefits only to see two major market declines sabotage the opportunity and your plan’s funded status. Riding the asset allocation rollercoaster hasn’t worked. Is the car that you are riding in nearing the peak at this time?

05.28.24
by

ARPA Update as of May 24, 2024

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

I hope that you enjoyed a long, restful weekend. Our thoughts and prayers are with all of the US service men and women who gave the ultimate sacrifice to enable the rest of us to continue to enjoy our freedom.

With respect to the ARPA legislation and the PBGC’s yeoman effort to implement, there was some activity last week. In fact, there were three plans that filed applications and one that received approval. Local Union No. 226 International Brotherhood of Electrical Workers Open End Pension Trust Fund, Local 1783 I.B.E.W. Pension Plan, and the Pressroom Unions’ Pension Plan each filed its initial application45 last week seeking SFA. The three plans are non-priority group members and in total they have asked for $127.4 million for just over 3,400 plan participants.

Happy to report that the UFCW Regional Pension Fund received approval for its application. The non-priority fund will receive $54.5 million, including interest, for its 4,605 participants. This bring the # of approved applications to 73 and a total of $52.2 million in final SFA amount approved including interest and FA loan repayments. There was no other activity report including applications denied, excess SFA repaid, plans added to the waitlist or plans on the waitlist setting a lock-in date for valuation purposes.

There is the possibility that 128 additional plans may receive SFA before the legislation expires. This total includes those under review, those plans that have withdrawn and not refiled, and finally, those plans on the waitlist that have yet to file the initial application.

05.21.24
by

Does This Look Like Success?

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

The following was a headline for a MarketWatch.com article, “The 401(k)’s success has been overlooked and will help even more Americans”, which I saw on a LinkedIn.com post earlier today. Sure, some American workers have benefited from their ability to fund a DC account, but the vast majority of Americans are struggling.

Does This look like success?

Perhaps the level of savings would be okay if DC plans were actually supplemental retirement vehicles, but since they have morphed into the primary retirement program for most workers, this is a disaster. I’m tired of the fact that we only ever see “average” balances reported. Of course, a few well-funded balances will drive the average up. Let’s focus on the MEDIAN account balances. Does a $70,620 account balance for a 65+ year-old participant look like a successful outcome? How much would that balance provide on a monthly basis for a roughly 20-year retirement?

If I were fortunate to have a defined benefit plan that provided $2,000/month (which isn’t a lot) for 20-years, I would receive $480K in retirement which is 6.8Xs what the 65+ year-old with the median account balance has today. It is a far cry when compared to the view that $1.4 million is the balance needed to have a dignified retirement today. It is silly to believe that the average American has the disposable income, investment acumen, and predictive ability to gauge how long they will live in order to allocate this meager balance to ensure that the recipient doesn’t outlive their savings.

The investment industry can celebrate all they want as it relates to the total accumulated wealth in defined contribution plans, but for the “median” American, it just isn’t close to being enough. Defined benefit plans should be the backbone of our retirement system, while DC plans occupy the supplemental role for which they were designed. As someone in that LinkedIn.com post stated, “the numbers don’t lie”. I would certainly agree, but that doesn’t mean that the #s are revealing success!

05.20.24
by

ARPA Update as of May 17, 2024

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

Welcome to the week before Memorial Day weekend. I hope that your plans are coming together nicely. As of right now, the weather in NJ is looking nearly perfect with no rain in the forecast until Tuesday. What are the odds that we get so lucky?

With regard to the implementation of the ARPA pension legislation by the PBGC, there was a little activity last week, as the Pension Plan Private Sanitation Union, Local 813 I.B. of T, a non-priority plan, submitted its initial application seeking just under $100 million in SFA for the 3,349 participants in the plan. This Long Island City, NY pension plan joins 12 other non-priority applicants seeking financial assistance. In total, there are currently 21 applications under review with potentially another 88 to go. What an effort being put forward by the PBGC.

Based on the info above, one can surmise that there were no applications denied or approved. There were no new applicants added to the waitlist or those currently under review withdrawn. Lastly, there were no plans asked to repay a portion of their grant received, leaving Central States as the only plan to date to rebate excess proceeds due to an incorrect population survey.

05.14.24
by

What’s The Hurry?

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

“Fed To Cut Rates in September, Say Nearly Two-thirds of Economists.”

This pronouncement was in large bold font on an email that I received this morning from the Wealth Advisor. Should I be skeptical? You bet!!

As you may recall, there was near unanimity among “economists” late last year that the US Federal Reserve would begin reducing rates RAPIDLY as the calendar flipped to 2024. In fact, consensus was fairly strong that there were going to be 4-6 cuts of between 1.0%-1.5%. There was even a leading bank that saw the need to reduce rates by 2.5% – oh, my. What happened? At this time I’m particularly interested in the 1/3 of economists that were predicting huge cuts at the end of 2023 that aren’t buying a September cut at this time. Those are the ones that I want to hear from.

What has changed from late last year when the labor market was strong, inflation was sticky, economic growth was stronger than expected, the stock market was raging ahead, and fiscal policy was in direct conflict with the Fed’s monetary objectives? Nothing has changed!

What is the urgency to cut rates? The Atlanta Fed’s GDPNow model is predicting a 4.2% annualized growth rate for Q2’24 (latest update as of May 8th). Does a growth rate of that magnitude warrant a rate cut? Heck no! Yes, there is the issue that most of today’s investors don’t remember the 1970s, if they were even born, but I do. Fed missteps lead directly to incredibly high inflation and US interest rates. Today’s rate environment is nothing compared to that era. Why risk a repeat? Stagflation became a reality. Is that something that you want to witness again?

Seniors and those living on a fixed income can finally earn some interest on their investments without having to dive into strategies that they don’t understand just to earn a little more interest. Pension plans can finally use fixed income to secure some or all of their promises to plan participants by matching bond cash flows of interest and principal with pension liabilities (benefits and expenses). Endowments and foundations can invest more cautiously knowing that they can earn a return from less risky assets that will help them achieve a return commensurate with their spending policy. This is all good stuff! Use this environment to take some of your assets off the asset allocation rollercoaster before our capital markets reach the apex of their journey. The next downward trajectory could be a doozy!

05.13.24
by

ARPA Update as of May 10, 2024

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

Another Monday brings the weekly update on the PBGC’s effort to implement the pension rescue under ARPA. As noted previously, activity has definitely slowed in recent weeks, and the week ending May 10, 2024 is no exception. I can report that the only activity on the PBGC’s ARPA spreadsheet is a withdrawal of a previously revised application. Employers’ – Warehousemen’s Pension Plan, a non-priority plan out of Los Angeles, was seeking $40 million in Special Financial Assistance (SFA) for just over 1,800 plan participants. The latest version of the application had been filed on March 4, 2024.

Unfortunately, there were no additional applications submitted or approved. At the same time, there were no additional applications withdrawn or denied. Lastly, no plans that might have received excess SFA have returned those excess assets at this tie outside of Central States. There remain 129 plans to still have their applications for SFA reviewed and approved.

Glen Eagle Trading reported the following in a recent email, that In 2023, a survey found that 78% of Americans live paycheck-to-paycheck, up six percentage points from the previous year. Unfortunately, in yet another survey 29% of Americans don’t earn enough to cover basic living costs. The ability to fund a retirement is getting to be more challenging than ever, which is why DB pension systems need to be be protected and preserved. The ARPA pension legislation is going a long way to securing pensions for millions of American workers who were on the verge of losing most, if not everything, that they had earned and counted on for their “golden years”.

05.09.24
by

Kinda Silly Question

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

If you ask the average person the following questions, I suspect that most people would answer in the affirmative.

Are you handsome?

Are you intelligent?

Are you honest?

So, I found it somewhat humorous when I saw the headline from a recent conference that said, “Private Credit managers say their is more room for growth”. Are you surprised? How many investment management organizations turn down new business when it presents itself? Does it really matter that private debt has seen something like 10X asset growth in the last couple of decades? Perhaps these managers have such a unique niche that they honestly believe that their product can manage through any challenge, especially one as “trivial” as natural capacity. How many times have you heard the following: “Our maximum capacity that we previously cited was just a target amount. Now that we actually have assets under management, it is clearer that we have much more capacity than initially anticipated.” Seems convenient, doesn’t it?

I can recall a few difficult conversations with both sales and senior management when I was leading an investment team at a previous shop. Our research and portfolio management teams did an outstanding job of determining the appropriate capacity for each strategy, and we had 50+ optimizations that each represented a strategy/product. We were particularly cognizant of the capacity associated with our market neutral product, which was roughly $3 billion in AUM. We had to be most careful with shorting stocks given the borrowing rates being charged by our prime brokers. The size of trades were always a concern. Yet, it really didn’t matter to outside parties that just wanted to see assets flow into our products. It didn’t matter whether or not we would be able to generate the return/risk characteristics as previously defined by our investment team.

These awkward conversations occur all too frequently, especially for investment companies that are public and have quarterly earnings expectations that must be met. I’ve never understood how the investment management industry can claim to be “long-term” investors yet be driven by quarter-to-quarter earnings announcements that impact the investment teams when layoffs are announced. Has our industry just morphed into a number of large sales organizations? Do we have “investment” firms focused on generating appropriate return and risk characteristics? Do these firms truly understand the capacity based on trading metrics?

I don’t work for a company that participates in the Private Credit arena. I couldn’t tell you whether or not there remains adequate capacity to enable managers in that space to generate decent return and risk characteristics. But asking managers in that space whether or not they can take on more assets and generate more fees is kinda silly. I hope that the asset consulting community has the tools to evaluate capacity for not only this asset class, but any other being considered for use in a DB pension. Given that most “active” managers have failed over time to generate a return in excess of their respective benchmark, I would hazard a guess that the natural capacity for their strategy has been eclipsed. These excess assets lead to ever increasing trading costs of market impact and time delays (not commissions). Couple those costs with the fees that active managers charge and you create a hurdle that is difficult to overcome.