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

Happy New Year! At least it was for some US equity investors prior to this afternoon’s release of the December FOMC meeting notes, which once again highlighted the fact that there is no interest rate pivot in anyone’s near-term future, and according to the Fed, we are unlikely to see one for all of 2023. The Fed cited “considerable uncertainty around the consumer spending outlook”. Based on the chart below, I’d say that consumers are not taking their collective feet off the gas peddle.

Sure, we’ve witnessed a rotation from durable goods to services, but pandemic constraints certainly contributed to the greater focus on durables during the last couple of years. Folks are tired of looking at their home’s four walls and are just itching to get back outside, even if it means having to deal with US aviation and all of its travails! Individuals have been working through their significant stimulus-induced excess savings, but with the labor market still humming along, spending can be maintained for quite some time. In fact, some Fed participants “…commented that labor supply appeared to be constrained by structural factors such as early retirements, reduced availability or increased cost of childcare, more costly transportation, and reduced immigration.” As a result, wage growth is likely to remain elevated for the foreseeable future, and demand for goods and services, too.

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

The last 43 years have been an extraordinary time for both bonds and stocks. Including the calendar year 1980, a 60% S&P 500 and 40% BB Aggregate asset allocation produced an incredible 10.44% annualized return, with only 8 down years during that period. This average return far exceeded the average ROA for pension America. The consistency of the equity and fixed income returns is what is most shocking, as there have only been 5 negative calendar years for bonds and 8 negative calendar years for equities. Furthermore, there has only been one year, 2022, in which both indices produced a negative return in the same calendar year. Is it a prelude of things to come or just an anomaly in a continuing extraordinary performance period for US markets?

What was unique about the last four decades that isn’t present today? First and foremost, we had the US 10-year Treasury Note yield finishing in 1980 at 12.4%. It would subsequently climb to 14% during 1981 before beginning its long descent to 0.7% at the end of 2020. At the same time, the Fed Funds Rate would hit 20% in 1980 and rise to 21% by June 1981 before beginning its fall to a zero interest rate policy (ZIRP) by 2021. That amazing interest rate change was done in an environment of 3% core inflation during those 43 years. Clearly, this scenario isn’t repeatable given where US rates are today. We find it somewhat humorous that investors are wringing their collective hands with a 10-year Treasury yield at 3.8% today.

Given our current employment situation (3.7% unemployment), wage growth averaging 6% annual growth, core inflation (PCE) at 5.5%, and a Fed that wants inflation @ 2% with real rates, we don’t see the Fed “pivoting” back to an easy money policy anytime soon. Without the incredible tailwind of falling rates enjoyed by market participants for 40+ years, we don’t expect the next 10 years to produce returns anywhere close to the annualized return of 10.44% produced by a 60%/40% asset allocation. Given this likely scenario, it becomes incredibly important to ensure that adequate liquidity is available to meet benefits and expenses. Adopting a cash flow matching strategy for the fixed income portion of the assets ensures liquidity while also “buying time” for the growth (alpha) assets to grow unencumbered. Given that 40 years of easy Fed policy is off the table, adopting a different approach, one that has worked for decades, should be considered before markets get even more challenging should a recession unfold.

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

The PBGC was flooded with applications for Special Financial Assistance (SFA) last week with the submission of 13 filings, including 8 Priority Group 5 initial applications, 3 Priority Group 2 (PG2) initial applications, 1 PG2 revised filing, and 1 PG2 supplemental application. Of the 5 Priority Group 2 plans, 3 were MPRA Suspension plans, while the other 2 were designated as Critical and Declining. In total, these 13 multiemployer funds were seeking SFA in the amount of $2.2 billion.

There were no applications approved, denied, or withdrawn last week. There was a resubmission of one withdrawn application. The United Furniture Workers Pension Fund A had withdrawn its initial application on 12/22 and resubmitted a revised filing on 12/29. They are seeking financial assistance of $214 million for its 11,302 participants. As the chart below highlights, only about 21% of the potential 304 applications have been filed. Once the last priority group (6) files (2/11/23), the remaining roughly 220 plans can begin to submit applications for SFA. It might very well become a free-for-all.

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

I suspect that most Americans wouldn’t be surprised to read that the US Middle Class continues to be impacted most negatively by four decades high inflation. According to a WSJ article, “purchasing power from paychecks fell 2.9% for middle-income households in 2022 compared with 2021”, as food and energy price increases impacted this cohort to a greater extent than those at both the top and bottom of the income spectrum. The median household income was $70,784 in 2021. However, increases in costs associated with housing, childcare, food, energy (household utilities), medical insurance, etc. are crushing the average American. Yes, inflation may have fallen from peak levels established this past Summer, but it is still running at levels that exceed both wage growth and the Fed’s 2% target. What have those most impacted done? Not surprisingly, they have withdrawn money from their “retirement” funds.

A new survey from Betterment which polled 1,000 full-time U.S. employees, found that 28% tapped into their 401(k) plans to help cover increasing expenditures in the last year. Incredibly, 71% of those polled are feeling more anxious about their retirement prospects, with 88% of those claiming that inflation and an increased cost of living have increased their financial anxiety. Regrettably, 24% of respondents indicated that they had reduced contributions to their retirement accounts. Another 41% said that they don’t have any funds saved for emergency purposes, which tells me that an unexpected major expense will have that subset tapping their “retirement” assets, too.

Let’s hope that the recent passage of the Secure Act 2.0 which includes the creation of emergency side pockets will help stabilize some of these financial conditions. No one knows how 2023 will play out, but it is critically important for all Americans, especially those in the Middle Class to see inflation near the Fed’s target. Let’s hope that the Fed’s forecast of US unemployment increasing from the current 3.7% level to an estimated 4.6% in 2023 doesn’t materialize or worse, exceed that estimate.

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

I was recently provided an opportunity to join Robert Morier and Dan DiDomenico on a Dakota Live Podcast. It was great fun to share insights with these two highly experienced investment professionals. There was so much to discuss regarding the current state of Pension America. The American worker is counting on us to ensure that they have the opportunity for a dignified retirement. Regrettably, many of these folks aren’t in a position to accomplish that objective. I hope that you find our insights beneficial. As always, please don’t hesitate to reach out to me with comments and questions. Always happy to respond.

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

Christmas came a few days early for a couple of multiemployer plans and their participants, as the PBGC approved the initial application for two MPRA Suspension plans, the International Association of Machinists Motor City Pension Plan and the Toledo Roofers Local No. 134 Pension Plan. As a reminder, participants in these two MPRA plans have been living with reduced benefits. The approval of the Special Financial Assistance (SFA) is the first step in seeing the original benefits restored and the participants made whole. It has been a long and arduous process for these folks. In total, these two plans have 1,384 participants and they will be receiving a total of $85.1 million in SFA.

In addition to approving the initial applications for the funds above, the PBGC also approved the supplemental applications for another four plans, including the Local 365 UAW Pension Trust Fund, the Management-Labor Pension Fund Local1730 ILA, the Local 408 International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America Pension Plan, and the Idaho Signatory Employers-Laborers Pension Plan. They will receive roughly $32.6 million for their nearly 6,000 plan participants.

The Retirement Plan of the Retirement Fund of Local 305 CIO’s Pension Fund, a Priority Group 5 plan, filed its initial application on December 20, 2022, and the PBGC has until April 19, 2023, to act on the application. This plan is seeking $34.7 million for its 918 members. The PBGC has 25 applications to review at this time, including 13 initial or revised submissions and 12 supplemental filings. There were no applications either rejected or withdrawn during the prior week.

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

Kuhn Loeb & Co. (there’s a name from the past) introduced the first bond indexes in the summer of 1973. It included:

Kuhn Loeb Bond Index = 3,650 investment grade corporate bond issues with MV = $120.1 billion

Long-term Corporate bond index = 1,481 issues with MV = $66.0 billion

Government/Agency bond index = 361 issues with MV of $138.4 billion.

Art Lipson was the head of fixed-income research and the inventor of these indexes. Ron Ryan, CEO, Ryan ALM, Inc. went to work for Art at Kuhn Loeb in early 1977 which was merged into Lehman Bros. in late 1977. Art decided to be a salesman and Ron took over as head of fixed-income research. 

Ron went on to design most of the popular Lehman bond indexes, including the Aggregate Index, which remains the industry’s primary bond benchmark today. If you desire insight into how to consistently beat the Aggregate Index, Ron is your man. His incredible insights have been recognized for decades, including being awarded:

William Sharpe Index Lifetime Achievement Award

  Money Management Letter Lifetime Achievement

Book “U.S. Pension Crisis” – IP Gold Award

  Bernstein Fabozzi Award of Excellence

I continue to learn new things every day from Ron despite being in this industry for 41 years and I know that you will, too. Thanks, Ron, for being a true visionary.

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

Last week, The Wealth Advisor published an article highlighting the onerous impact of rising US interest rates on the performance of large (>$1 billion) bond funds, which were screened using data compiled by Bloomberg and Morningstar Direct and excluded short-duration offerings. There were 198 funds that were identified and from that universe, it was determined that only two – T. Rowe Price Dynamic Global Bond Fund and the JPMorgan Strategic Income Opportunities Fund (3.4% and 0.3%, respectively) – had produced a positive return in 2022 as of the date of the article 12/21/22. This news isn’t shocking, as we understand that interest rate risk is the single greatest risk for bonds.

Fixed-income managers have enjoyed nearly four decades of declining US interest rates. That tailwind, which fueled superior performance, has been replaced by a significant headwind that threatens to blow for quite some time to come. How will plan sponsors and their consultants react to this shifting landscape? Will they continue to use core and core plus bond mandates as performance instruments or will they determine that the best use for fixed income is in the certainty of their cash flows? Those cash flows can be modeled to meet ongoing benefit payments and plan expenses chronologically from the next month’s liquidity needs as far out as the allocation can fund. The beauty of this implementation is the fact that benefits and expenses are future values that are not interest rate sensitive.

One can effectively use bonds through a cash flow matching strategy (aka CDI) without fear of the Fed and how their policy decisions might negatively impact bonds. This “sleep-well” at-night strategy has been time-tested for decades.  It was called Dedication in the 1970s and 1980s. Through this implementation, plan sponsors have now bought time (expanded time horizon) for all of the alpha assets in their portfolios to grow unencumbered. Why make a bet on where rates are going? Just eliminate interest rate risk by adopting a CDI implementation. You can now sit back on FOMC announcement days without fear of what the Fed will say. How comforting!

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

Producing posts/articles on the Ryan ALM, Inc. blog has been very rewarding for me. I’ve now produced more than 1,160 posts that date back 2019 when I joined Ryan ALM and prior to that during my days at Kamp Consulting Solutions (KCS). Producing a blog on a fairly regular basis is challenging in that I want to make sure that what we produce is relevant and helpful for the pension/investment industry. I hope that it has proven to be. Furthermore, there is also no place to hide! Everything that has been produced is there for all to see on the Ryan ALM web site http://www.RyanALM/Insights/White-Papers.

I have great respect for the people in our industry but often find myself challenging how pension plans are operated, which seems to be driven by the status quo. After more than 41-years in this business I’ve come to the conclusion that given each plan’s unique liability stream, it is critically important that a custom solution be created to ensure that the plan’s benefit promises (liabilities) to its participants are SECURED at both a reasonable cost and with prudent risk.

It is fine to claim to be a long-term investor, but it is another thing not to react to a market environment that appears to be entering a watershed event, which don’t present themselves often. The nearly 40-year decline in US interest rates from 1982 that fueled the massive equity and bond returns during that period of time had gotten long in the tooth despite the incredible returns posted by US equity markets in 2021. I highlighted my concerns in a November 22, 2021 post titled “This is No Time to be Greedy”. My concerned centered on the fact that asset allocations had gotten much more aggressive and allocation to both bonds and cash had been significantly reduced.

I said, “the thought that fixed-income assets could be a source of liquidity when equity investments were under pressure was a very reasonable assumption during the last 39 years of a bull market for bonds. However, the next equity market crash may be driven by inflationary pressures forcing US interest rates higher. In that case, all bets are off as to the ease by which bonds can be sold and cash raised! I further stated, “bonds should be used for their value… the certainty of their cash flow – period! “An additional benefit (of cash flow matching) includes the mitigation of interest rate risk on the portion of the portfolio that is being defeased through CDI, as cash flows are funding future benefits which aren’t interest-rate sensitive.”

Pension plans’ fund status had improved, and funded ratios were more elevated than they’d been in years. I challenged those in the pension industry to not sit idly. That after 40 years of easy money we were about to experience a paradigm shift that would significantly impact pension America. The US Federal Reserve doesn’t believe that the current inflation is transitory. As such, they are committed to raising US interest rates until they have accomplished the job of getting inflation back to 2%, whether or not you believe that is the right objective. Given strong employment and wage growth, the Fed has their job cut out for them. This idea that the Fed will engage in a great pivot seems unreasonable. Core inflation remains too high, US rates are likely to continue to rise putting additional pressure on return-seeking fixed income strategies and equities. Have you prepared your portfolio to deal with this likely reality? There was an opportunity at the end of 2021 to take some risk off the table. Are we going to miss another opportunity in 2022? We, at Ryan ALM, urge pensions to separate liquidity assets from growth assets. Let the fixed income allocation be the liquidity assets that buy time for the growth assets to grow unencumbered!

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

SECURE ACT 2.0 continues where the SECURE Act ended following its 2019 passage. There is a lot to this legislation We will be touching on various aspects of this legislation to discuss how it helps Americans in their quest to achieve a dignified retirement and where it might fall short.

In order to better understand aspects of this legislation, I reached out to my friend Kendra Isaacson, Pensions Policy Director and Senior Tax Counsel at Senate HELP Committee for Senator Patty Murray, Chair, who with other members of her team were able to shepherd through this legislation and get it included into the Congressional Omnibus Spending Bill. Kendra shared her favorite aspects of the bill, including the following: “I am the most excited about the pension-linked emergency savings accounts. Our theory is that this will draw lower-income, new participants in the retirement system who may have been nervous about locking their money up in a retirement plan.” I couldn’t agree more that this is an important step forward.

For years, I felt that DC offerings were nothing more than glorified savings accounts that were often raided by participants experiencing financial hardship. Having a “side pocket” for emergency purposes is an outstanding enhancement that hopefully encourages lower-wage earners to establish a retirement account. According to Kendra, “it is designed that employers would match into the associated defined contribution plan so participants can have an emergency savings account for short-term needs while working on their long-term retirement savings.” Again, this is a wonderful step forward IMHO.

I can assure you that there are individuals on both sides of the aisle that have great concerns about whether or not this legislation goes far enough. As stated earlier, we will continue to highlight the pros and cons in future blogs. Until then, let’s celebrate Kendra and her committee’s accomplishments.