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

Given the significant escalation in US interest rates during the last 20 months, it isn’t surprising that the investing community has taken a greater interest in bond strategies that can help reduce risk within a pension plan. We, at Ryan ALM, Inc. have provided detailed analysis to dozens of plan sponsors, consultants, and actuaries related to our work as cash flow matching (CFM) experts.

Each analysis reveals a significant reduction in the cost to SECURE the future promised benefits and the expenses incurred to provide those promises. Importantly, the longer the coverage period the greater the cost savings, as bond math is very straightforward: the longer the maturity and the higher the yield the lower the cost.

Despite the evidence suggesting that reducing risk and future expense is quite achievable, action has been slow to come. Why? Do those engaged in the management of pensions really like the uncertainty that comes with investing in markets? Do they like the rollercoaster ride that we’ve been on since 2000, when most pension plans were significantly overfunded only to see funded status plummet and contributions escalate as we went through a series of mind-blowing market events?

Pensions blew an opportunity to take substantial risk off the table after the 1990’s. Are we going to miss another golden opportunity today? Remember: the primary objective in managing a DB plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is not and never has been a return objective! Focusing on return instead of the pension liabilities subjects the plan’s assets to this unnecessary ride of markets up and down and the implications of that action.

At the end of October, we were producing investment grade portfolios that were yielding close to 6% and in some cases >6% YTW. Plan sponsors could have reduced future benefit costs by as much as 70%. Unfortunately, Treasury yields have plummeted in November with the 10-year Treasury note yield down about 70 bps from its peak achieved in late October. The cost to defease those future liabilities has now gone up. For some of the plans that we have analyzed, that cost increase is in the 100s of millions!!! What a wasted opportunity. Again, what are you waiting for?

Everyone that touches a DB pension plan is a fiduciary. We have an obligation to the plan participants to do what is best for their pension system. I suggest that continuing to ride the asset allocation rollercoaster is not the best or fiduciarily prudent approach to the management of pensions. Humans hate uncertainty! Why are those engage in the management of pension assets embracing the uncertainty that comes with investing in the capital markets?

Instead of having all of your pension assets focused on the return on asset assumption (ROA), split the assets into two buckets: liquidity and growth. The liquidity assets should be a defeased bond strategy (CFM) that ensures that the benefits are covered chronologically as far into the future as the allocation goes. Now the growth assets have all the time in the world to grow unencumbered in order to meet future liability growth. Extending the investing horizon always leads to a higher probability of achieving the desired outcome. Stop living in a day-to-day cycle of gains and losses. Adopt this approach and everyone associated with that pension plan will sleep better knowing that no matter what happens today, those promised benefits are secure. Cash flow match liabilities with certainty and BUY TIME for the growth assets to grow unencumbered…what a concept!

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

You may recall that 20 days ago in a blog post titled, “Oh, What A Beautiful Morning”, I threatened to break out into song. I didn’t then and I won’t now. You are welcome! However, the gist of my enthusiasm was the announcement that IBM would be converting a 5% company 401(k) match into a 5% contribution into a retirement account that very much sounded like a cash balance plan.

In a recent P&I article, more details of the IBM plan were revealed. As previously known, they are eliminating the company 401(k) match and they will be replacing it with a cash balance component called a “retirement benefit account” (RBA), which is part of the IBM Personal Pension Plan, a defined benefit plan. YES! Details regarding the RBA are available in the 2024 IBM U.S. Benefits Guide.

From the Guide, “All regular employees begin participating in the RBA after one year of service.” “You (the employee) will receive a monthly pay credit that is 5% of your eligible pay, and your balance will grow with interest, which is applied monthly.” The interest rate will be 6% per year through 2026. Beginning in 2027, the interest rate applied to the RBA will be the 10-year US Treasury yield with a minimum of 3% through 2033.

Importantly, unlike the IBM 401(k), one does not have to contribute to be eligible for a RBA contribution. Each employee is eligible after 1 year of service and their benefit vests immediately. The employee has flexibility in what they do with the benefit once they leave IBM, including taking a lump sum, annuitizing the balance, rolling it into the IBM 401(k) plan or into an IRA.

According to the IBM benefits guide, this action is being taken to provide a “stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility.” Furthermore, IBM employees may continue to contribute to the existing 401(k).

Let’s hope that this action by IBM reignites conversations within HR departments on the importance of a defined benefit-like structure as the primary retirement offering. Defined Contribution plans are terrific as supplemental retirement structures, but many American workers are not in a position to fund, manage, and then disburse a benefit through a DC plan. Let us help them realize the American dream of a dignified retirement.

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

We hope that you had a wonderful Thanksgiving holiday!

Given the short work week it isn’t surprising that there wasn’t a ton of activity related to the ARPA legislation. However, there were two plans that received approval from the PBGC for SFA grant money. Twin Cities Bakery Drivers Pension Plan and the United Association of Plumbers and Pipefitters Local 51 Pension Fund will receive $25,981,671 and $16,486,118, respectively, for their combined 2,589 plan participants. The amounts above include interest.

There have now been 69 successful SFA applications processed amounting to $53.57 billion in grants awarded to these multiemployer plans. In addition, there are currently 19 applications being reviewed and another roughly 90 yet to be submitted. Wonderful!

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

The PBGC has recently published its annual performance and financial report for 2023. Because of the ARPA legislation and the grant monies awarded to 35 distressed plans (covering roughly 615,000 participants), the Multiemployer Program had a net positive position of $1.5 billion at the end of FY 2023, compared with $1.1 billion at the end of FY 2022. Terrific news. The ARPA legislation is doing exactly what it was intended to do.

With regard to the single-employer program, the PBGC reported a net position of $44.6 billion at the end of FY 2023, compared with $36.6 billion at the end of FY 2022. Question: Does the PBGC need to have this type of surplus, especially given the improved funding of single employer plans in the US? As I recently posted, Milliman’s 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans, reported that the average funded ratio for the constituents in the index rose from 103.6% at the end of September to 104.2% as of October 31. Given the improved funding, we’ve encouraged the plan sponsor community to utilize the elevated interest rate environment to de-risk and secure the promised benefits through a cash flow matching approach. Has the PBGC undertaken such an initiative?

Furthermore, wouldn’t it be wiser at this time to reduce the premiums (excessive) paid by sponsoring organizations to assist them in maintaining these important retirement programs or perhaps even encourage the reopening of plans closed because of the high cost to provide them? Does the PBGC really need to have a $44.6 billion net position? We’ve seen the impact on the American worker from having to rely on defined contribution plans as the only employer-sponsored retirement program. Encouraging the use of defined benefit plans would not only help the individual worker, but it would help the sponsoring organization manage its labor force.

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

Fidelity has provided an update through Q3’23 for participants in their 401(k), 403(b), and IRA accounts. The third quarter proved challenging for the participants who saw declines in each of the plan types. The average 401(k) balance declined 4% to $107,700, while the average 403(b) account balance fell 5% ($97,200). With regard to IRAs, those balances declined by 4% to an average of $109,600.

What I find disheartening, but not shocking, is the fact that an increasing number of individuals are accessing their retirement savings through in-service withdrawals, hardship withdrawals or loans. During the third quarter, 2.8% of participants took a loan from their 401(k). The percentage of workers with an outstanding loan increased slightly to 17.6%, compared to 17.2% last quarter and 16.8% in Q3 2022. More troubling, in Q3, 3.2% of participants took an in-service withdrawal, marking a 2.7% increase from a year ago, and forcing the participant to pay taxes and penalties.

Again, defined contribution plans are beneficial as supplemental retirement accounts, but because of easy access to the assets, they remain nothing more than glorified savings accounts. Furthermore, can we encourage the “record keepers”, such as Fidelity, to report on the median balances in these various types of plans. Doing so would provide a truer picture of the state of retirement-readiness in the US.

Fidelity’s Q3 2023 401(k) data was based on 25,300 corporate defined contribution plans and 22.9 million participants, as of September 30. Its IRA analysis was of 14.6 million accounts as of September 30, 2023, and its 403(b) data was based on 10,165 tax-exempt plans and 8.3 million plan participants as of September 30, 2023.

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

We at Ryan ALM, Inc. wish for you and your family a wonderful Thanksgiving holiday.

On another note, it is a Monday which means that we provide you with an update on the PBGC’s progress implementing the ARPA legislation. This past week has been relatively quiet in terms of visible output, as there was only one new application added to the current review queue. Pacific Coast Shipyards Pension Plan, a non-priority plan, has submitted a revised application having withdrawn the initial request on October 25th. This plan is seeking nearly $17.9 million in grant money for its 507 plan participants.

In other news, there were two applications that were withdrawn during the week, as United Food and Commercial Workers Union Local 152 Retail Meat Pension Plan and the Pension Plan of the Moving Picture Machine Operators Union Local 306 pulled the applications. In the case of the UFCW plan, this was the initial submission seeking $262.8 for the 10,252 plan participants for the non-priority group member. The Machine Operators, a Priority Group 5 member, recalled a revised application which is seeking $19.8 million for the 542 members of this plan.

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

I recently saw an interesting LinkedIn.com post that touched on marketing one’s firm in the investment management industry. It claimed that most asset management organizations spend tons of money on marketing with little to show for the effort. I agree! 

The post had to do with how you present your firm’s capability to the world in a way that might just differentiate them from their peers. But, I don’t think that the marketing stinks because you can’t articulate why you’re different. I think there are few firms that stand out because of the lack of focus on the retirees.

The defined benefit (DB) pension industry has been around for a very long time, but despite the significant importance of providing a promised benefit to the plan participant each and every month, they are fading away. This is tragic. 

Why is this happening? I believe that we lost focus. The primary objective in managing a DB pension plan should be to secure the promised benefits at a reasonable cost and with prudent risk. Somewhere along the way, that objective was replaced by one focused solely on generating a return that – – if achieved (and that’s a BIG IF) – – would minimize the contributions needed to fund the original promise.

What that ignores is that asset class returns come with risk on an annual basis, and in some cases, significant variability. That uneven return pattern led to periods of significant drawdown on the plan’s assets, and the need to make up for those losses with greater contributions. Sponsoring entities didn’t like the impact that those volatile contributions had on their financial statements (this is especially true for corporate plans). I can’t say that I blame them.

There are a lot of people who play a part in securing a retirement for members: the plan sponsors/trustees, custodians, asset consultants, third-party administrators, actuaries, lawyers, accountants, and asset managers (sorry if I missed your specific role). Each one of these businesses plays an important role in the sacred promise to each and every plan participant that they can retire secure in their financial well-being. It is our collective responsibility to ensure that the funds necessary to meet the promised benefits are available. Furthermore, it is our responsibility to provide our services at both a reasonable cost and with prudent risk. 

Can we all say that we’ve done that?

At Ryan ALM, Inc. we know that we are but one of thousands of organizations engaged in the management of DB plans, but we know our purpose. We may be a fixed income shop focused on cash flow matching (CFM), but it is much more than that. We have as our mission the lofty goal of protecting and preserving DB plans for the masses, one DB plan at a time. We know that there is no substitute for a DB plan. That getting a monthly retirement check after a long working career is the least that an American worker should expect, and we collectively have not done well meeting that expectation. We know that pension plans riding the asset allocation rollercoaster aren’t making the necessary progress to keep their promises, while potentially jeopardizing ongoing support for the idea of a retirement program itself.

Let’s get back to pension basics. Let’s get off the asset allocation rollercoaster! Bifurcate your assets into liquidity and growth buckets. Fixed income should be the core holding as bonds are the only asset class that has a known terminal value and a contractual semi-annual interest payment. An allocation to a cash flow matching strategy will ensure that the benefit payments are the focus of the pension plan. Your plan will now have the necessary liquidity to meet each and every payment chronologically as far into the future as that allocation will go. GREAT NEWS: we haven’t had an interest rate environment as favorable as the current one in two decades. Now is the time to act.

Finally, let’s once again realize that the primary pension objective is the keeping of our promises to those who’ve dedicated their careers to us. Let us all work together to secure those promised benefits at both a reasonable cost and with prudent risk. The entire concept of dignified retirement for each American hangs in the balance. That is a huge responsibility that we all have a stake in.

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

During the last week, I’ve reported on two reports from the Milliman organization. Each pertained to the current state of pension funding with one focused on corporate plans while the other addressed public pension systems. Both studies follow the funding for the top 100 plans in each of the two categories.

With regard to corporate plans, Zorast Wadia, author of the PFI, disclosed that in aggregate the top 100 plans had seen negative asset performance for the third consecutive month. Becky Sielman, co-author of Milliman’s PPFI, also mentioned that asset performance was down in October, and that the Top 100 public plans had also suffered negative performance for the third straight month. In the case of the corporate index the aggregate performance was -2.7% knocking total assets down by $40 billion for the 100 plans, while public plan aggregate performance had declined by only -1.9%, but the asset loss was roughly $89 billion.

Despite the similar performance results, it was reported that corporate plans saw aggregate funding improve as the funded ratio went from 103.6% at the end of September to 104.2% as of October 31. Good for Corporate America! On the other hand, the PPFI highlighted that aggregate pension funding had deteriorated as the funded ratio fell from 73.2% to 71.4%. So, that raises the question: How could both monthly studies highlight negative performance yet corporate plans enjoyed an improved funded ratio, while public pensions saw deterioration by 1.8%?

Well, it comes down to the valuing of plan liabilities. Corporate plans use a more market-based rate (under FASB accounting rules) which is an AA corporate yield curve rate to value their pension obligations, while public pension systems can use the ROA (GASB accounting rules) as the discount rate for their liabilities. In the current environment, with US interest rates rising, the present value (PV) of those future value (FV) liabilities have fallen to a greater extent than the plan assets. With regard to public pension accounting, given the use of the ROA, liability values don’t reflect current market interest rates.

Ryan ALM, Inc.’s founder, Ronald J. Ryan, CEO, wrote an insightful book several years ago titled, “The U.S. Pension Crisis”. It is a deep dive into accounting rules for pension plans, which he believes have distorted the economic reality for pension plans, especially public funds. As I highlighted above, you have two types of plans that experienced similar asset declines, yet one saw improved funding while the other witnessed funding deterioration. How does that make sense? Actuaries have a very challenging job. Why do we make it more challenging given the disparate valuation methodologies? Some in our industry will argue that public pension systems are “Perpetual”. As we’ve seen on a number of occasions, that doesn’t make them sustainable.

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

Last week we reported on the Milliman Corporate Pension Funding Index report. Yesterday, Milliman released the results for their Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans.

Unfortunately, the aggregate funded ratio deteriorated from September’s 73.2% to 71.4% as of October 31. The 100 plans experienced a decline of roughly -1.9% during the month marking the third consecutive negative month for the index. The decline in asset values totaled about $89 billion giving the 100 plans a market value of about $4.4 trillion. Becky Sielman, co-author of the PPFI, reported that  “At the end of October, only 12 of the plans were more than 90% funded, while 26 were below the 60% funding mark.”

According to Becky, the last 12 months have seen six months with positive performance and six months with market declines. Once again highlighting the fact that pension America just rides the asset allocation rollercoaster up and down. It is time to get off that ride!

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

Like Chicken Little, many in our industry believe that the sky is about to fall on top of us as a result of the abundant US debt financing. It is expected that record levels of Treasury debt will need to be “purchased” and refinanced at increasingly higher levels of interest. As a result, we’ve recently learned that Moody’s has placed a negative watch on Treasuries. It follows on the heels of the action taken by Fitch in August (AA+).

Given all of the noise surrounding current and future Treasury auctions, investors are worrying that we have borrowed too much. However, I’m reminded by my former colleague, Charles DuBois, who referenced Paul Sheard, former Chief Economist at S&P, who put the issue in its proper framework. According to Charles, Paul supposedly stated that the issue is not “have we borrowed too much?” But rather “have we created too much purchasing power?”.

This is a major issue facing the US Federal Reserve at this time as they consider their next move in this rate cycle. It is also an issue that doesn’t get nearly the attention that it deserves. Not surprisingly, the investment community celebrated a CPI reading today that came in light, but they need to understand that the stimulus currently being put into the economy through record deficit spending may offset recent gains made through the FOMC’s rate action. Prolonged wars on two fronts might just lead to further deficit spending and greater inflation. In that scenario, the Fed will have great difficulty meeting the investment community’s collective expectation of falling, and in some cases, dramatically falling rates in 2024.

There isn’t a lot of slack in our economy at this time. If the government continues to maintain this level of stimulus, GDP growth is going to have to shrink in a meaningful way. But is that happening? According to the Atlanta Fed’s GDPNow model, we should expect annualized real GDP growth of 2.1% for Q4’23. That doesn’t indicate substantial weakness. For today we will celebrate a CPI that is closing in on the Fed’s 2% target. But it remains too early for victory to be declared.