Category Archives: Uncategorized

01.14.25
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Hey, Pension Community – We Have Liftoff!

By: Russ Kamp, CEO, Ryan ALM, Inc.

Not since October of 2023 have we seen long-dated Treasury yields at these levels. Currently, the 30-year Treasury bond yield is 5% (12:47 pm EST) and the 10-year Treasury Note’s yield has eclipsed 4.8%. Despite tight credit spreads, long-dated (25+ years) IG corporate bond yields are above 6% today (chart in the lower right corner).

Securing pension liabilities, whether your DB plan is private, public, or a multiemployer plan, should be the primary objective. All the better if that securing (defeasement strategy) can be accomplished at a reasonable cost and with prudent risk. The good news: the current rate environment is providing plan sponsors with a wonderful opportunity to accomplish all of those goals, whether you engage in a cash flow matching (CFM) for a relatively short period (5-years), intermediate, (10ish-years) or longer-term (15- or more years) your portfolio of IG corporate bonds will produce a YTM of > 5.5%. This represents a significant percentage of the target ROA.

Furthermore, as we’ve explained, pension liabilities are future values (FVs), and FVs are not interest rate sensitive. Your portfolio will lock in the cost savings on day one, and barring any defaults (about 2/1,000 in IG bonds), the YTM is what your portfolio will earn throughout the relationship. That is exciting given the fact that traditional fixed income core mandates bleed performance during rising rate regimes. In fact, the IG index is already off 1.2% YTD (<10 trading days).

Who knows when the high equity valuations will finally lead to a repricing. Furthermore, who knows if US inflation will continue to be sticky, the Fed will raise or lower rates, geopolitical risks will escalate, and on and on. With CFM one doesn’t need a crystal ball. You can SECURE the promised benefits for a portion of your portfolio and in the process you’d be stabilizing the funded status and contribution expenses associated with those assets. Don’t let this incredibly attractive rate environment come and go without doing anything. We saw inertia keep plans from issuing POBs when rates were historically low. It is time to act.

01.13.25
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ARPA Update as of January 10, 2025

By: Russ Kamp, CEO, Ryan ALM, Inc.

Welcome to the second full week of January. Although the PBGC’s efiling portal remains temporarily closed, there was still some good activity last week, including the approval of another three applications seeking Special Financial Assistance (SFA). Pleased to report that Laborers’ Local No. 265 Pension Plan, Local 734 Pension Plan, and Upstate New York Engineers Pension Fund each a non-priority group member received approval for their revised applications. In total, they will receive $244.6 million in SFA for the 11,374 plan participants. What an exciting way to begin 2025.

In other news, there was one application withdrawn, Warehouse Employees Union Local 169 and Employers Joint Pension Plan, from Elkins Park, PA, withdrew its initial application seeking nearly $90 million in SFA for just over 3,600 members of the plan.

The 108 funds receiving SFA to date have been awarded grants exceeding $70 billion benefiting the quality of life for more than 1.4 million American workers. There is still much more to do (possibly another 94 funds will get SFA), but the program has already been an incredible success. Finally, US Treasury yields continue to rise, providing pension plans with the wonderful opportunity to further de-risk the SFA assets received and those to come. IG corporate bond yields exceeding 6% are not rare. Let us know how we can help you.

01.08.25
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Corporate Funding Improved Significantly in 2024!

By: Russ Kamp, CEO, Ryan ALM, Inc.

Milliman is out with the year-end report on corporate pension funding and it tells a beautiful story. The Milliman 100 Pension Funding Index (PFI), is reporting an average 105% funded ratio at the end of 2024 compared to 99.5% at the end of 2023. But wait, assets for the top 100 plans only grew by 4.2%, which must have been below the stated ROA. Furthermore, total assets declined by $26 billion after accounting for benefits and expenses. How is that possible? Oh, I get it, the growth in liabilities matters.

Milliman is reporting that the discount rate used to value corporate pension liabilities increased 59 bps during the year from 5.0% at 12/31/23 to 5.59% as of year-end 2024. That significant move up in rates drove the present value of those pesky liabilities down by -$94 billion creating a $68 billion improvement in the asset/liability relationship and a significantly improved funded ratio! Congrats corporate America and the participants that you serve!

I was recently asked by an industry reporter if the “underperformance” of corporate plans versus other sponsoring groups – public and multiemployer – should be a concern. I, of course said NO, that managing a DB plan is all about the relationship of assets to liabilities. Both could have negative or positive growth rates, but if asset growth exceeds liability growth the plan wins! It is really a simple concept.

Now, I would suggest that corporate America get even more conservative at this time, as we live in an environment of stretched valuations, stubborn inflation, the prospect of higher rates, etc. Congrats on your collective victory. Secure those promises through a cash flow matching (CFM) strategy that will not only provide you with the security that the benefits are protected, but the enhanced liquidity and lengthened investing horizon for any residual growth assets will also be realized.

As always, thanks to Zorast Wadia and the Milliman organization for taking the time to produce this important analysis. Without good data, it is difficult to know how to play the game – assets versus liabilities is the name of the pension game!

01.07.25
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Ryan ALM, Inc.’s Q4’24 Newsletter

By: Russ Kamp, CEO, Ryan ALM, Inc.

We are pleased to share with you Ryan ALM Inc.’s Q4’24 Newsletter. As you will read, the fourth quarter saw asset values continue to grow, while the present value of pension liabilities fell due to rising U.S. interest rates. Asset growth has far exceeded liability growth in 2024 leading to improved funded ratios for all DB plan types.

The current level of U.S. rates is supportive of derisking strategies – primarily through cash flow matching (CFM). Given elevated valuations in a number of asset classes and strategies, it makes sense to reduce risk at this juncture before the markets take no prisoners.

As always, we encourage you to reach out to us with your questions. We want to be your source for anything liability-related. Please don’t hesitate.

01.07.25
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Will You Do Nothing?

By: Russ Kamp, CEO, Ryan ALM, Inc.

I recently read an article by Cliff Asness of AQR fame, titled “2035: An Allocator Looks Back over the Last 10 Years”. It was written from the perspective that performance for world markets was poor and his “fund’s” performance abysmal during that 10-year timeframe. His take-away: we can always learn from our mistakes, but do we? He cited some examples of where he and his team might have made “mistakes”, including:

Public equity – “It turns out that investing in U.S. equities at a CAPE in the high 30s yet again turned out to be a disappointing exercise”.

Bonds – “Inflation proved inertial” running at 3-4% for the decade producing lower real returns relative to the long-term averages.

International equities – “After being left for dead by so many U.S. investors, the global stock market did better with non-U.S. stocks actually outperforming”.

Private equity – “It turned out that levered equities are still equities even if you only occasionally tell your investors their prices”. When everyone is engaged in pursuing the same kind of investment there is a cost.

Private credit – “The final blow was when it turned out that private credit, the new darling of 2025, was just akin to really high fee public credit” Have we learned nothing from our prior CDO debacle?

Crypto – “We had thought it quite silly that just leaving computers running for a really long time created something of value”. “But when Bitcoin hit $100k we realized that we missed out on the next BIG THING” (my emphasis) “Today, 10 after our first allocation and 9 years after we doubled up, Bitcoin is at about $10,000.”

Asness also commented on active management, liquid alts, and hedge funds. His conclusion was that “the only upside of tough times is we can learn from them. Here is to a better 2035-2045”

Fortunately, you reside in the year 2025, a year in which U.S. equities are incredibly expensive, U.S. inflation may not be tamed, U.S. bonds will likely underperform as interest rates rise, the incredible push into both private equity and credit will overwhelm future returns, and let’s not discuss cryptos, which I still don’t get. Question: Are you going to maintain the status quo, or will you act to reduce these risks NOW before you are writing your own 10 year look back on a devastating market environment that has set your fund back decades?

As we preach at Ryan ALM, Inc., the primary objective when managing a DB pension plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. Continuing to invest today in many segments of our capital markets don’t meet the standard of low cost or of a prudent nature. Now is the time to act! It really doesn’t necessitate being a rocket scientist. Valuations matter, liquidity is critical, high costs erode returns, and no market outperforms always! Take risk off the table, buy time for the growth assets to wade through the next 10-years of choppy markets, and SECURE the promised benefits through a cash flow matching (CFM) strategy that ensures (barring defaults) that the promised benefits will be paid when due.

Thanks, Cliff, for an excellent article!

01.06.25
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ARPA Update as of January 3, 2025

By: Russ Kamp, CEO, Ryan ALM, Inc.

Welcome to 2025. May it prove to be an incredible year for all of us.

The PBGC seems to have hit the pause button on the continuing implementation of the ARPA legislation. Not surprising given the holidays and what has been accomplished to date, with more than 100 multiemployer plans approved to receive the Special Financial Assistance (SFA). As we’ve reported throughout the nearly 3 1/2 years of the legislation’s implementation, this was a massive undertaking. Despite a couple of missteps, I believe that the PBGC has done an incredible job. As a result, 1,425,291 plan participants have had their benefits secured and in some cases, restored to the original promise.

Despite the incredible effort to date, there remains much to do with 97 plans still waiting for approval of the submitted applications or to file an initial or revised application. Fortunately, US Treasury yields have once again elevated providing those funds yet to file an opportunity to invest the SFA in a CFM strategy that will secure the promised benefits at reduced cost.

12.30.24
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How Many Words Do You Need?

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

In 1971, David Gates, singer-songwriter for the band Bread, published the song “IF”. The song begins with the lyrics, “If a picture paints a thousand words…”. If David was correct and a picture does in fact paint 1,000 words, then how many words do you think that the picture below is producing? First, I don’t think that you need many words, certainly not 1,000, to know precisely what is being conveyed in the graph below. But, on the other hand, you could probably write 1 million words about the current state of the US equity market, especially large cap stocks, which have performed exceptionally well for the second consecutive year basically on the back of mega technology stocks benefitting from the “promise” of AI.

The S&P 500 has now advanced more than 20% in each of the last two calendar years and four of the last six years. According to Glen Eagle trading, “only three times in history has it done so for a third: 1935-36 (followed by a 39% plunge in 1937), 1954-55 (a 2.6% rise in 1956), and 1995-98 (nearly 20% in 1999)”. But, please don’t forget that the NASDAQ 100 collapsed by more than -80% beginning in March 2000 – 2002. Those stats portend some potentially serious consequences if no action is taken now.

The graph above was produced by Mike Zaccardi, CFA, CMP, who highlights the fact that the current level of the S&P’s forward looking P/E multiple is likely to produce a 10-year annualized return for the S&P 500 that is likely to be negative. If not negative, certainly not robust enough to support US pension plans hoping to generate a roughly 7% annualized return on assets (ROA). That’s the bad news!

The good news is that there is an alternative to letting the equity exposure ride. As I’ve written about recently, US Treasury bond and note yields have risen to levels last witnessed earlier this year. Comparable maturity investment grade corporate bonds have historically average a roughly 1.2% yield premium. If the average spread were realized (they are tight today), one could get a roughly 5.75%-6.00% YTW with little volatility. Adopt a cash flow matching strategy as the core holding creating a level of certainty that is not possible through a traditional asset allocation framework.

Don’t subject the pension assets to unnecessary risk. Regrettably, periods of significant negative returns are not unheard of and often lead to dramatically increased levels of contributions needed to improve the plan’s funded status. As always, we are more than willing to produce a FREE analysis on what could possibly be achieved through the adoption of a CFM strategy. The time to act is now and not after the S&P 500 suffers a correction.

12.30.24
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ARPA Update as of December 27, 2024

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

We, at Ryan ALM, Inc., wish for you a happy, healthy, and prosperous New Year in 2025. May the markets continue to treat you well. However, nothing grows to the heavens, so it may be wise to alter one’s asset allocation and reduce risk as the year begins given inflated valuations, particularly for large cap US equities.

Regarding ARPA and the PBGC’s on-going effort implementing this critical legislation, there was a pause in activity during the last week. Good for them, as 2024 has been an incredibly busy and successful year. Regarding last week, the PBGC’s eFiling portal remains temporarily closed, so there were no new applications filed. There also weren’t any applications denied, withdrawn, or approved. Finally, there were no repayments made by funds that had received excess SFA.

To recap 2024, the PBGC approved 36 applications, awarding more than $16.2 billion in SFA grants that went to support the promised benefits for 458,446 plan participants. WOW! As the chart below highlights, only 15 of the 87 Priority Group members have yet to have the applications for SFA approved. Three of those applications are currently under review. Of the 115 funds seeking support that weren’t initially identified as a Priority Group member, 64 pension plans have participated to some extent in this program with 33 of those applications approved.

US Treasury note and bond yields (longer maturities) have risen sharply in the last few months. They are at levels not witnessed since early this year. As a result, they are providing plan sponsors with a wonderful opportunity to reduce risk without giving up potentially higher returns. We’d be happy to provide a free analysis on what could be achieved within your plan. Don’t hesitate to reach out to us.

Again, Happy New Year!

12.27.24
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Pension Strategy: Play Football

By: Russ Kamp, CEO, Ryan ALM, Inc.

We are happy to share with you the latest thoughts from Ron Ryan, Chairman, Ryan ALM, Inc. However, before we do, I’d like to wish Ron a happy birthday – hope that it is a terrific day!

His latest research focuses on the idea that pension management should be approached in a similar fashion to how a football coach prepares for an opponent. Attack the opponent’s weaknesses, while staying clear of their strengths. The primary objective in managing a pension plan should be to secure the promised benefits at the lowest cost possible. It shouldn’t be a return focus, which only ensures greater volatility, but not necessarily success.

All of Ryan ALM’s research and blog posts can be found at RyanALM.com. We hope that you’ll invest some time to go through the many insightful pieces that Ron and the team have produced throughout the years. Finally, we wish for you and yours a wonderful 2025.

12.23.24
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Is Now The Time To Act?

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

Equity market participants were recently reminded of the fact that markets can fall, and unfortunately they usually don’t decline with any kind of notice. The impetus behind the markets’ most recent challenging day was the Fed’s relatively tame forecast for likely interest rate moves in 2025. There is no question in my mind that the nearly 4-decade decline in rates from lofty heights achieved in the early ’80s, when the Fed Funds Rate eclipsed 20%, to the covid-fueled bottom reached in early 2020, when the yield on the 10-year Treasury Note was at 0.5%, made bond returns a lot stronger than anyone’s forecast.

It certainly seemed that the US Federal Reserve provided the security blanket any time there was a wobble in the markets. This action allowed “investors” to keep their collective foot on the gas with little fear. Sure, there were major corrections during that lengthy period, but the Fed was always there to lend a hand and a ton of stimulus that propped up the economy and markets, and ultimately the investment community. As we saw in 2022, the Fed had run out of dry powder and ultimately had to raise US interest rates to stem a vicious inflationary spike. Rates rose rather dramatically, and the result was an equity market, as measured by the S&P 500, that declined 18% for the calendar year. Bonds faired only marginally better as rising rates impacted bond principals creating a collective -12.1% return for the BB Aggregate Index.

As we enter 2025, do we once again have a situation in which the Fed’s ability to reduce rates has been curtailed due to a stronger economy than anticipated? Will the continued strength and massive government stimulus drive inflation and rates higher? According to a blog post from Apollo’c CIO, here are his list of the potential risks and the probabilities:

Risks to global markets in 2025

Interesting that he feels, like we do at Ryan ALM, Inc., that the economy is likely to be stronger than most suspect (#6) leading to higher inflation, rising rates (#7), and a 10-year Treasury Note yield in excess of 5% (#8). That yield is currently at 4.6% (as of 3:06 pm).

For those that might be skeptical, the Atlanta Fed’s GDPNow model is currently forecasting GDP growth for Q4’24 at 3.1% annualized. They have done a wonderful job forecasting quarterly growth rates. Their forecasts have consistently been above the “street’s” and as a result, much more accurate.

In addition, despite the third rate cut by the Federal Reserve at the most recent FOMC meeting of their benchmark Fed Funds Rate (-1.0% since the easing began), interest rates on longer dated maturities have risen quite significantly, as reflected below.

Rising US rates, stronger growth, and greater inflation may just be the formula for a significant contraction in equity valuations, especially given the current level. Be proactive. Reduce risk. Secure the promised benefits. Under no circumstance should you just let your “winnings” ride.