Author Archives: russkamp

04.12.24
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The Truth Will Set You Free!

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

Managing a pension plan should be all about securing the promised benefits at a reasonable cost and with prudent risk. I believe that most plan sponsors would agree, yet that is not how plans are managed, especially public and multiemployer plans that continue to pursue the return on asset assumption (ROA) as if it were the Holy Grail. I’ve written quite a bit on this subject, including discussing asset consulting reports that should have the relationship of plan assets to plan liabilities on page one of the quarterly performance reports.

We know that pension liabilities are like snowflakes, as there are no two pension liability streams that are the same given the unique characteristics of each labor force. Furthermore, most pension actuaries only produce an annual update making more frequent (monthly/quarterly) updates more challenging. Would plan sponsors want a more frequent view of the liabilities if they were available? I think that they would. Again, if securing the promised benefits are the primary objective when it comes to managing a pension plan, then plan sponsors need a more frequent view of the relationship between assets and liabilities.

Why is this important? First and foremost, the capital markets are constantly moving, and the changes impact the value of the plan’s assets all the time. But it isn’t just the asset-side that is being impacted, as liabilities are bond-like in nature and they change as interest rates change. We’ve highlighted this activity in both the Ryan ALM Pension Monitor and the Ryan ALM Quarterly Newsletter. However, accounting rules for both multiemployer and public plans allow a static discount rate equivalent to the plan’s ROA to be used that hides the impact of those changing interest rates on the value of a plan’s liabilities and funded status.

What if a more frequent analysis was available at a modest cost. Would plan sponsors want to see how the funded status was behaving? Would they want that comparison available to help with asset allocation changes, especially if it meant reducing risk as funding improved? I suspect that they would. Well, there is good news. Ryan ALM, Inc. created a Custom Liability Index (CLI) in 1991. The CLI is designed to be the proper benchmark for liability driven objectives. The CLI calculates the present value of liabilities based on numerous discount rates (ASC 715 (FAS 158), PPA – MAP 21, PPA – Spot Rates, GASB 67, Treasury STRIPS and the ROA). The CLI calculates the growth rate, summary statistics, and interest rate sensitivity as a series of monthly or quarterly reports depending on the client’s desired frequency.

The above information is for an actual client, who we’ve been providing a CLI for 15+ years. This client has elected to receive quarterly reviews. They’ve also chosen to see the impact on liabilities for multiple discount rates, including a constant 4.5% ROA, which could easily be a pension plan’s ROA of say 7%. As you will note, the present value (PV) of those future value (FV) liabilities are different, and they could be dramatic, depending on the interest rate used. In this case, the AA Corporate rate (5.48% YTW) produces a funded ratio of 56.7%, while the flat 4.5% rate increases the PV liabilities thus reducing the funded status by more than 20%.

Using Treasury STRIPS as the discount rate produces the lowest funded ratio of 33.7% or 23% lower than using the AA Corporate discount rate.

With this information, plan sponsors and their advisors (consultants and actuaries) can make informed decisions related to contributions and asset allocation. Most plan sponsors are currently blind to these facts. As a result, decisions may be taken without having all of the necessary facts. Pension plans need to be protected and preserved (Ryan ALM’s mission). Having a complete understanding of what those future promises look like is essential.

You’ve made a promise: measure it – monitor it – manage it – and SECURE it…   

Get off the pension funding rollercoaster – sleep well!

04.09.24
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Ryan ALM, Inc. Q1’24 Newsletter

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

We are pleased to provide you with the Ryan ALM, Inc. Q1’24 Newsletter. You’ll find lots of interesting information related to defined benefit pensions, with a particular focus on pension liabilities. The firs quarter of 2024 was a good quarter for pension America, as rising rates and strong asset gains combined to improve funded status for all plan types.

That said, there have been several recent articles that included comments from leading actuaries imploring plan sponsors to take risk out of their current asset allocations. We’ve encouraged pension plan sponsors to do that for decades, as riding the asset allocation rollercoaster has only lead to increased contribution expenses and volatility of the funded status. It is time to adopt a new approach. One that will secure the promised benefits and allow participants and plan sponsors to sleep better at night.

Please don’t hesitate to reach out to us if you’d like more information on how to de-risk a plan. We’ve written chapter and verse on the subject.

04.08.24
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ARPA Update as of April 5, 2024

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

Welcome to ECLIPSE DAY. Good luck found me in Dallas today for the TexPERS conference, as it is in the path of totality (complete darkness). Bad luck has it heavily overcast today following a Sunday that had beautiful blue skies. Oh, well. Perhaps we’ll get lucky.

APRA’s implementation by the PBGC has slowed, and we don’t have earthquakes (NJ residents are still shaking their heads), eclipses, or any other natural event to blame. That is not to say that nothing has been done, as there was one new application received during the week. Printing Local 72 Industry Pension Plan, a Priority Group 5 member, submitted its revised application seeking $37 million in SFA for the 787 plan participants. Beyond that, I suspect that they are busy reviewing the 19 applications that have been submitted that are currently waiting on approval. Only 5 of those applications are the initial version.

As we’ve discussed in previous updates, census data used to determine SFA grant payments has had to be checked and rechecked following the announcement that Central States received more SFA grant $ than they were eligible to receive since some of the participants were no longer alive. That revelation and the corrective measures taken to ensure that SFA monies are only being allocated for eligible participants has really slowed an already cumbersome review. Despite some of these impediments, it is great that 72 plans have gotten the SFA awards totaling nearly $54 billion.

We might not have great visibility as it pertains to the eclipse, but with US interest rates tending higher, inflation remaining more “sticky” than hoped, and a Fed that may just not cut in 2024, visibility is clearer that cash flow matching the SFA is the way to secure the benefits and expenses well into the future. As a reminder, as rates rise, the cost to defease those promised benefits falls. Higher rates aren’t only good for savers. They are particularly good for SFA recipients and all plan sponsors of DB plans.

As an example of how that math works, when I entered this industry on October 13, 1981, the 10-year Treasury was yielding 14.9%. It would have only cost you $17.82 to defease a $1,000 30-year liability. On August 4, 2020, when the 10-year Treasury yield dipped to 0.52%, it would have cost you an extraordinary $860.40 to defease the same $1,000 30-year liability. As of April 5, 2024, the 10-year Treasury is yielding 4.41% and the cost to defease that 30-year liability is much more manageable at $301.00. You should be cheering for a higher for longer scenario.

04.05.24
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It is Time to Bag the Agg!

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

We are happy to share with you a research piece titled “Bond Index Recommendation: Bag the Agg!“, written by Ronald J. Ryan, CEO, Ryan ALM, Inc. It includes a wonderful history lesson regarding the first bond indexes produced by Kuhn Loeb in the mid ’70s, and how Ron got involved to eventually create the “Lehman” indexes that are still so prominent today. There is also a nearly 50-year look back at a Kuhn Loeb index document. There aren’t many in our industry today who will remember the Kuhn Loeb letterhead.

Of equal importance is Ron’s opinion that the Aggregate Index has served its useful purpose and it is time for a rethink. Replacing the Agg won’t be easy, but with a renewed focus on the primary pension objective which is to secure the promised benefits at a reasonable cost and with prudent risk, it becomes easier to understand. The Ryan organization is focused on securing the pension promise through cash flow matching. In order to successfully implement such a strategy, a “Custom Liability Index” (CLI) must be created given each pension plan’s unique liabilities. The CLI is now the benchmark of choice for investment professionals to manage against.

I’m sure that you will appreciate Ron’s history lesson and his rationale for wanting to “retire” the Aggregate Index as the primary fixed income benchmark. Enjoy!

04.05.24
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Corporate Funding Improves in March – Milliman

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

Milliman released the results of its latest Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Pension funding improved for the third consecutive month to start the year, which now stands at 105.6% from 105.3% at the end of February. March was a bit different, however, as the discount rate declined 11 basis points increasing the collective liabilities by $14 billion to $1.299 trillion at the end of the quarter. Despite the increase in liabilities, investment performance was once again strong leading to a gain of $19 billion. Total assets now stand at $1.373 trillion.

Zorast Wadia, author of the PFI, stated, “the funded status gains may dissipate unless plan sponsors adhere to liability-matching investment strategies. Zorast’s observation is outstanding. Should rates fall from these levels, the cost to defease pension liabilities will grow. Now is the time to take risk off the table. Create certainty by getting off the asset allocation rollercoaster. Engaging in Cash Flow Matching (CFM) does not necessitate being an all or nothing strategy. Start your cash flow matching mandate and extend it as the funded status improves.

Return-seeking bond strategies will lose in an environment of rising rates. However, once a plan engages in CFM, the relationship between plan assets and liabilities is locked. Done correctly, assets and liabilities will move in tandem. It doesn’t matter what interest rates do, as benefit payments are future values that are not interest rate sensitive.

Act now to create some certainty! You’ll appreciate the great night’s sleep that you’ll start to have.

04.04.24
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Ryan ALM, Inc. Pension Monitor Q1’24

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

We are pleased to share with you the Ryan ALM, Inc. Q1’24 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.

With regard to Q1’24, Public pension funds (2.2%) underperformed Corporate Pension plans (3.7%) by 1.5% as ASC 715 discount rates showed a negative growth rate of -1.5% for Q1’24 while the discount rate using the average ROA (GASB accounting) would have appreciated by 1.8%. This outperformance by corporate pension plans was accomplished despite the much greater exposure to US fixed income within corporate pension plans (45.4%) versus both public (18.7%) and multiemployer (18.2%) and the far less exposure to US equities (12.6%) versus publics (21.9%) and multiemployer (22.2%).

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

04.03.24
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What Are the Stats Telling Us?

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

Mark Twain quoted Benjamin Disraeli in his 1907 autobiography, when he stated “Lies, damned lies, and statistics” as a phrase used to describe the persuasive power of statistics to support weak arguments. Folks who regularly read my posts know that I am a frequent user of statistics to support my arguments, whether they are strong or weak. As a young man, I would study the sports section box scores and the backs of my baseball cards for every possible stat. It is just who I am. I love #s!

The investment management industry is inundated with statistics. You can’t go a day without a meaningful insight being shared in reference to our industry, the economy, interest rates, politics, companies, commodities, etc. I try to absorb as many of these stats as possible. However, it is easy to fall prey to confirmation bias, which humans are prone. Putting a series of statistics together and building an investment case is never easy. That said, we at Ryan ALM, Inc. have been saying since the onset of higher rates that the US Federal Reserve would likely be forced to keep rates higher for longer, as inflation would remain stickier than originally forecast.

We also didn’t see a recession on the horizon due to an incredibly strong US labor market, which continues to witness near historic lows for unemployment. Despite the retiring of the Baby Boomer generation, the labor participation rate is up marginally during this period of higher rates, indicating that more folks are looking for employment opportunities at this time. They are being supported by the fact that job openings remain quite elevated relative to pre-Covid-19 levels at roughly 880k. When people work, they spend! Wage growth recently surprised to the upside. Will demand for goods and services follow? It usually does.

Furthermore, as we’ve disclosed on many occasions, financial conditions are NOT tight despite the rapid rise in US interest rates from the depths induced by the pandemic. Long-term US rates remain below the 50-year average, and in the case of the US 10-year Treasury note, the yield difference is roughly -2.1%. Does that give the Fed some room to possibly increase rates should inflation remain elusive?

In just the past week, we’ve had oil touch $85/barrel, the Atlanta Fed’s GDPNow model increase its forecast for Q1’24 growth from 2.3% to 2.8%, a Baltimore bridge collapse that will impact shipping and create additional expense and delays, housing that once again exceeded expectations, Fed (Powell) announcements that a recession wasn’t on the horizon, job growth (ADP) that was the highest in 8 months, manufacturing that stopped contracting for the first time since 2022 (17 months), and on and on and… Am I kidding myself that our case for higher for longer is the right call? Am I only using certain stats to “confirm” the Ryan ALM argument?

We don’t know. But here is the good news. Our investment strategy doesn’t care. As cash flow matching experts, we are agnostic as to the direction of rates. Yes, higher rates mean lower costs to defease those future benefit promises, so higher rates are good. However, once we match asset cashflows of interest and principal to the liability cash flows (benefit payments and expenses), the direction of rates becomes irrelevant, as future values are not interest rate sensitive. Building an investment case for cash flow matching was challenging when rates were at historic lows. It is much easier today, as one can invest in high quality investment-grade corporate bonds and get yields in the range of 5%-5.5%, which is a significant percent of the average return on asset assumption (ROA) with much less risk and volatility of investing in equities and other alternatives.

I don’t personally see a case for the Fed to cut rates in the near future. I think that it would be a huge mistake to once again ease monetary policy before the Fed’s objective has been achieved. I lived through the ’70s and witnessed first-hand the impact on the economy when the Fed took its collective foot off the brake. As a result, I entered this industry in 1981 when the 10-year Treasury yield was at 14.9%. The Fed can’t afford to repeat the sins of the past. I believe that they know that and as a result, they won’t act impulsively this time.

04.01.24
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ARPA Update as of March 29, 2024

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

Good morning, and welcome to a new month/quarter. Still feels like winter in the northeast! But there has been a thaw with regard to activity at the PBGC as they implement the ARPA legislation.

Happy to report that the Pension Plan of the Moving Picture Machine Operators Union Local 306 and the New England Teamsters Pension Plan both submitted applications seeking SFA. The Machine Operators, a priority group 5 member, is seeking $19.4 million for its 542 participants, while the NE Teamsters are hoping to capture more than $5.4 billion in SFA for just over 72k plan members. If the NE Teamsters are successful, they will have received the second largest grant to date only trailing the Central States Teamsters whopping $35.8 billion. To date, there have been 5 awards of greater than $1 billion. Currently, there are four plans seeking >$1 billion that are under review including the NE Teamsters.

In other news, the United Food and Commercial Workers Union Local 152 Retail Meat Pension Plan, had its application approved for an SFA grant of $279.3 million which will support the benefits for 10,252 members. There were no applications denied or withdrawn during the previous week. In addition, there were no pension funds added to the waitlist that continues to have 86 potential applications waiting to submit an application from the initial 113 members.

The upcoming week will provide some insight into the continuing strength of the US labor market with the ADP and US employment releases as well as the weekly initial claims data. However, it doesn’t appear that market participants are waiting to see what those data sets reveal as US Treasury bonds and notes are seeing a big move up in yields today. This movement hurts total return focused fixed income products, but it provides those pension plans with more attractive yields for cash flow matching assignments. Higher yields mean lower cost to defease future benefit payments. Very nice!

03.28.24
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The Importance of Liquidity

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

I recently came across an article written by a friend of mine in the industry. Jack Boyce, former Head of Distribution for Insight, penned a terrific article for Treasury and Risk in July 2020. The title of Jack’s article was “We Need to Talk About the Armadillo in the Room”. It isn’t just a funny title, but an incredible simile for the two primary stages of a pension plan, notably the accumulation and decumulation stages of pension cash flows. The move from a positive cash flow environment to a negative cash flow environment creates a hump that is reminiscent of the shape of an armadillo.

I stumbled on an armadillo at TexPERS last summer and truthfully didn’t think at that time that I was looking at a pension funding cycle, but I’ll never look at an armadillo again without thinking about Jack’s comparison. But the most important aspect of Jack’s writing wasn’t that he correctly associated the funding cycle with a less than cuddly animal, it was the fact that he highlighted a critically important need for pension plan sponsors of all types – liquidity! I’ve seen far too often the negative impact on pension plans and endowments and foundations when appropriate and necessary liquidity is not available to meet the promises, whether they be a monthly benefit, grant, or support of operations.

The last thing that you want to have happen when cash is needed is to be forced to raise liquidity when natural liquidity is absent from the market. There have been many times when even something as liquid as a Treasury note can’t be sold. Just harken back to 2008, if you want a prime example of not being able to transact in even the most liquid of instruments. Bid/ask spreads all of a sudden resemble the Grand Canyon. As we, at Ryan ALM have been saying, sponsors of these funds should bring certainty to a process that has become anything but certain. Jack correctly points out that “a typical LDI approach focuses on making sure the market value of a plan’s assets and the present value of its liabilities move in lockstep.” However, too often “these calculations fail to factor in the timing of cash flows.” We couldn’t agree more. Where is the certainty?

His recommendation mirrors ours, in that cash flow matching should be a cornerstone of any LDI program. Using the cash flow of interest and principal from investment grade bonds to carefully match (defease) the liability cash flows secures the necessary liquidity chronologically for as long as the allocation is sustained. By creating a liquidity bucket, one buys time for the remaining assets in the corpus to now grow unencumbered. As we all know, time is an extremely important attribute when investing. I wouldn’t feel comfortable counting on a certain return over a day, week, month, year, or even 5 years. But give me 10-years or more and I’m fairly confident that the expected return profile will be achieved.

Jack wrote, “pension plan sponsors need thoughtful solutions”. We couldn’t agree more and have been bringing ideas such as this to the marketplace for decades. Like Jack, “we believe a CDI approach can simultaneously improve a plan’s overall efficiency and the certainty of reaching its long-term outcome.” Certainty is safety! We should all be striving for this attribute.

03.25.24
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Public Pension Funding Improves – Milliman

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

Milliman is reporting that funding for public pensions improved in February. According to Milliman’s Public Pension Funding Index (PPFI), which analyzes data from the nation’s 100 largest public defined benefit plans, the average funded ratio improved from 77.7% at the end of January to 78.6% as of February 29, 2024. This represents the highest funded status since May 2022, which was just after the Fed (March) started raising US interest rates.

The PPFI plans returned an estimated 1.7% in aggregate for February. “Individual plan returns ranged from an estimated 0.0% to 3.2% for the month, while the plans gained around $79 billion in total market value”, according to the report. The current deficit between assets and liabilities now stands at $1.33 trillion following an improvement of $56 billion in the past month.

According to Becky Sielman, co-author of Milliman’s PPFI, by the end of February “we’re holding on to the gains we saw in Q4 of last year, with 21 plans above 90% funded, and 15 plans below 60% funded.” Please note that accounting rules for public pensions allow for the discounting of liabilities at the plan’s return on asset assumption (ROA). The median rate stood at 7% in this study. US interest rates have backed up nicely during the first 2+ months of calendar year 2024. The actual improvement in the average funded status may be understated.