Category Archives: Uncategorized

10.23.24
by

That’s Not Right!

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

I’ve recently had a series of terrific meetings with consultants, actuaries, and asset owners (mostly pension plans) about cash flow matching (CFM). I believe that most folks see the merit in using CFM for liquidity purposes, but often fail to see the benefit of bringing certainty to a portfolio for that segment that is defeasing asset cash flows relative to liability cash flows (benefits and expenses). I’m not entirely sure why that is the case, but one question comes up regularly. Question: If I use 30% of my assets on lower yielding fixed income, how am I supposed to meet my ROA objective? I guess that they believe that the current 4.75% to 5% yielding investment grade corporate portfolio will be an anchor on the portfolio’s return.

What these folks fail to understand is the fact that the segment of the portfolio that is defeasing liability cash flows is matched as precisely as possible. The pension game has been won! If the defeased bond portfolio represents 30% of the total plan, the ROA objective is now only needed to be achieved for the 70% of assets not used to SECURE your plan’s liabilities. The capital markets are highly uncertain. Using CFM for a portion of the plan brings greater certainty to the management of these programs. Furthermore, we know that time (investing horizon) is one of the most important investment tenets. The greater the investing horizon the higher the probability of achieving the desired outcome, as those assets can now grow unencumbered as they are no longer a source of liquidity.  It bears repeating… a major benefit of CFM is that it buys time for the growth assets to grow unencumbered.

Plan sponsors should be looking to secure as much of the liability cash flows (through a CFM portfolio) as possible eliminating the rollercoaster return pattern that ultimately leads to higher contribution expenses. As mentioned above, capital markets are highly uncertain. The volatility associated with a traditional asset allocation framework has recently been calculated by Callan as +/-33.6% (2 standard deviations or 95% of observations). Why live with that uncertainty? In addition, Goldman Sachs equity strategy team “citing today’s high concentration in just a few stocks and a lofty starting valuation” forecasts that the S&P 500 “will produce an annualized nominal total return of just 3% the next 10 years, according to the team led by David Kostin, which would rank in just the 7th percentile of 10-year returns since 1930.” (CNBC)

Given that forecast, I wouldn’t worry about the 5% fixed income YTW securing my pension liabilities. Instead, I’d worry about all the “growth” assets not used to secure the promises, as they will likely be struggling to even match the YTW on a CFM corporate bond portfolio.

10.21.24
by

What Will Their Performance be? Continued

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

I recently published a post titled, “What Will Their Performance be in About 11 Years?” I compared the Ryan ALM, Inc. cash flow matching (CFM) strategy to a relative return fixed income manager, and I raised the question about future performance. Barring any defaults within the investment grade universe, which historically average about 2/1,000 bonds, we can tell you on day one of the portfolio’s construction what the performance will be for the entire period of a CFM mandate.

In my previous post, I stated, “now, let me ask you, do you think that a core fixed income manager running a relative return portfolio can lay claim to the same facts? Absolutely, not! They may have benefitted in the most recent short run due to falling interest rates, but that future performance would clearly depend on multiple decisions/factors, including the duration of the portfolio, changes in credit spreads, the shape of the yield curve, the allocation among corporates, Treasuries, agencies, and other bonds, etc. Let’s not discount the direction of future interest rate movements and the impact those changes may have on a bond strategy. In reality, the core fixed income manager has no idea how that portfolio will perform between now and March 31, 2035.

Whatever benefit the active relative-return fixed income manager might have gotten from those declining rates earlier this year has now been erased, as Treasury yields have risen rapidly across all maturities since the Fed announced its first cut in the FFR. Including today’s trading, the US 10-year Treasury note yield has backed up 67 bps since the yield bottomed out at 3.5% in mid-September (currently 4.17% at 11:40 am). The duration of the 10-year note is 8.18 years, as of this morning. That equates to a loss of principal of -5.48% in roughly 1 month. Wow!

Again, wouldn’t you want the certainty of a CFM portfolio instead of the very uncertain performance of the relative return fixed income manager? Especially when one realizes that the active fixed income manager’s portfolio won’t likely cover the liquidity needed to meet benefits and expenses. Having to “sell” bonds in a rising rate environment locks in losses for the active manager, while the CFM portfolio is designed to meet ALL of the liquidity through maturing principal and income – no selling. This seems like a no-brainer!

10.21.24
by

ARPA Update as of October 18, 2024

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

Major League baseball finally has the last two competitors for this year’s World Series. As a Mets’ fan, I would have appreciated a different outcome, but it was a surprisingly good season for the team from Flushing! Good luck to the Yankees and Dodgers.

With regard to ARPA and the PBGC’s effort to implement this important pension legislation, last week provided just a couple of updates for us to digest. There were no new applications submitted, approved or denied. The PBGC’s eFiling Portal remains temporarily closed at this time. There were also no new systems seeking to be added to the waitlist at this time.

There was one application withdrawn. PA Local 47 Bricklayers and Allied Craftsmen Pension Plan, a non-priority group plan, withdrew its initial application last week that was seeking $8.3 million for the 296 participants in the plan.

The last bit of activity to discuss relates to the repayment of excess SFA as a result of census corrections. Teamsters Local Union No. 52 Pension Fund became the 22nd plan to repay a portion of their SFA received. In the case of Local No. 52, they repaid $1.1 million, which represented 1.15% of their grant. The largest repayment to date has been the $126 million repaid by Central States (0.35% of grant). In terms of percentages, the Milk Industry Office Employees Pension Trust Fund returned 2.36% of their grant marking the high watermark, while Local Union No. 466 Painters, Decorators and Paperhangers Pension Plan, was asked to return only 0.11% of their reward.

Finally, US interest rates have risen significantly since the Fed’s first rate cut on September 18th, as highlighted in the graph below. The higher rates reduce the present value of those future benefit payments and helps to stretch the coverage period provided by the SFA.

10.16.24
by

Milliman: Public Pension Funded Ratio at 82.8%

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

Milliman recently released results for its Public Pension Funding Index (PPFI), which covers the nation’s 100 largest public defined benefit plans.

Positive equity market performance in September increased the Milliman 100 PPFI funded ratio from 82.0% at the end of August to 82.8% as of September 30, representing the highest level since March 31, 2022, prior to the Fed’s aggressive rate increases. The previous high-water mark stood at 82.7%. The improved funding for Milliman’s PPFI plans was driven by an estimated 1.4% aggregate return for September 2024 (9.4% for the YTD period). Total fund performance for these 100 public plans ranged from an estimated 0.7% to 2.1% for the month. As a result of the relatively strong performance, PPFI plans gained approximately $72 billion in MV during the latest month. The asset growth was offset by negative cash flow amounting to about $10 billion. It is estimated that the current asset shortfall relative to accrued liabilities is about $1.138 trillion as of September 30. 

In addition, it was reported that an additional 5 of the PPFI members had achieved a 90% or better funded status (34 plans have now eclipsed this level), while regrettably, 14 of the constituents remain at <60%. Given that changing US interest rates do not impact the calculation for pension liabilities under GASB accounting, which uses the ROA as the liability discount rate, the improvement in the collective funded status may be overstated, as US rates continued to decline throughout the third quarter following an upward trajectory to start the calendar year.

10.15.24
by

We Are # 29 – WOW!

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

The  16th annual Mercer/CFA Institute Global Pension Index report was released on Oct. 15. I want to extend a big thank you to Mercer and the CFA for their collective effort to elevate retirement issues, while celebrating those countries who are getting it right. According to the survey, “the overall index value is based on three weighted sub-indices—adequacy (40%), sustainability (35%) and integrity (25%)—to measure each retirement income system. Adequacy looked at areas such as benefits, system design, savings and government support. Sustainability examined pension coverage, total assets, demography and other areas. Integrity encompassed regulation, governance and protection.” There are more than 50 indicators that support these three broad categories.

The United States was given a score of 60.4 (63 in 2023’s study), which placed our retirement readiness at 29 of 48 countries that were evaluated. That 29 is 7 spots lower than 2023’s rank. According to the Mercer CFA study, a score of 60.4 places us slightly below the average score (63.4) among those ranked and we were given a letter grade of C+. I don’t know about you but if I had scored a 60 (scale of 0-100) during my school days, my letter grade would have likely been an F. Based on how I feel that we are prepared as a nation, I think that an F is much more appropriate than a C+. What about you?

I’m not trying to pick on the U.S. retirement system, which scored 63.9 on adequacy, 58.4 on sustainability and 57.5 on integrity, with Integrity being the poorest ranking as it trailed the worldwide average score by >16 points at 74.1. Our retirement system was evaluated based on the Social Security system and voluntary private pensions, which may be job-related (DB or DC) or personal, such as an IRA. Other systems with comparable overall index values to the U.S. (60-65) included Colombia (63), Saudi Arabia (60.5) and Kazakhstan (64.0). I don’t know about you but being ranked among those countries doesn’t make me feel warm and fuzzy about our effort or achievement. Systems scoring the highest were the Netherlands (84.8), Iceland (83.4), Denmark (81.6), and Israel (80.2) – they were given an ‘A’ grade.

Anyone participating in our industry knows that can AND MUST do better. The loss of DB pension plans within the private sector is a very harmful trend. Leakage within DC plans makes them more like glorified savings accounts rather than retirement vehicles, and Social Security provides small relief for a majority of recipients. As I’ve uttered on many occasions, asking untrained individuals to fund, manage, and then disburse a “retirement benefit” without the financial means, investment skill, and a crystal ball to forecast longevity is just silly policy.

Mercer and the CFA institute recommended a series of potential reforms to improve the long-term success of the US retirement system. I just loved this one:

“Promoting higher labor force participation at older ages, which will increase the savings available for retirement and limit the continuing increase in the length of retirement;“

A truly amazing suggestion – if you never retire then you don’t have to worry about whether or not your system will provide an adequate benefit! Problem solved! Many Americans would welcome the opportunity to extend their careers/employment opportunities, but some jobs require physical labor not easily done at more mature ages, while many American companies are anxious to rid themselves of higher priced and experienced talent in favor of younger workers (ageism?).

When I wrote about this survey last year, I’d hoped that the higher US interest rate environment would begin to improve outcomes for our workers whether their plans are a defined benefit or defined contribution offering. Unfortunately, current trends have US rates falling again. That just puts more pressure on DB plans and individual participants in DC plans and encourages (forces) everyone to take more risk. That development isn’t going to help next year’s score!

10.15.24
by

ARPA Update as of October 11, 2024

By: Russ Kamp, Ryan ALM, Inc.

I hope that you enjoyed a wonderful holiday weekend. Autumn’s beautiful colors are finally present in the Northeast – enjoy those, too. As you will soon read, the PBGC had a busy week according to its latest update, so the extra day of rest was likely necessary.

The PBGC’s effort implementing the ARPA legislation continues in full swing. During the prior week there were three new applications received, two approved, another 2 withdrawn, and finally there were two more plans rebating excess SFA as a result of census corrections. Thankfully, there were no applications rejected. Lastly, there were no multiemployer plans seeking to be added to the waitlist (non-Priority Group members).

The plans receiving approval included Midwestern Teamsters Pension Plan and the Carpenters Pension Trust Fund – Detroit & Vicinity. The Carpenters nailed a $635.0 million SFA grant for its 22,576 participants, while the much smaller Midwestern Teamsters plan received $23.6 for 615 members. The PBGC has now awarded $68.6 billion in SFA grants to 94 pension systems.

Sheet Metal Workers’ Local No. 40 Pension Plan, Warehouse Employees Union Local 169 and Employers Joint Pension Plan, and Local 111 Pension Plan were granted the opportunity to submit requests for SFA grants. In the case of Local 111, they submitted a revised application. They are collectively seeking $124,7 million for 6,193 plan members. Good luck! In other news, the Teamsters Local 210 Affiliated Pension Plan and Local 111 Pension Plan withdrew their initial applications. These two funds were seeking $137.3 million collectively.

Finally, Milk Industry Office Employees Pension Trust Fund and Local 805 Pension and Retirement Plan rebated excess SFA grant money as a result of a census audit that confirmed overpayment. The Milk Industry delivered $193k (2.4% of the SFA received) to the PBGC, while Local 805 forked over $3.2 million (1.8% of the grant). Both represented a larger percentage of the SFA received than the previous transactions. At this time, 21 plans have returned $147.5 million in SFA and interest representing 0.37% of the grants received.

I hope that you find these updates useful. I remain incredibly bullish regarding the ARPA legislation and the positive impact that it continues to have on the American worker that earned this pension promise. Please don’t hesitate to reach out to Ryan ALM with any questions related to the legislation and what should be done to secure the promised benefits with the SFA grant assets.

10.11.24
by

That’s comforting!

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

The Fed’s meeting notes from the September 17-18 FOMC have recently been released. Here are a few tidbits:

Some officials warned against lowering rates “too late or too little” because this risked harming the labor market.

At the same time, other officials said cutting “too soon or too much” might stall or reverse progress on inflation.

Here’s my favorite:

Officials also don’t seem in agreement over how much downward pressure the current level of the Fed’s benchmark rate was putting on demand.

I have an idea, why don’t we just have each member of the Federal Reserve’s board of governors stick their finger in the air and see which way the economic winds are blowing. It may be just as effective as what we currently seem to be getting.

Given that the economy continues to hum along with annual GDP growth of roughly 3% and “full employment” at 4.1%, I’d suggest that having a Fed Funds Rate at 5.25%-5.50% wasn’t too constraining, if constraining at all. We’ve highlighted in this blog on many occasions the fact that US rates had been historically higher for extended periods in which both the economy and markets (equities) performed exceptionally well – see the 1990’s as one example.

Furthermore, as we’ve also highlighted, there is a conflict between current fiscal and monetary policy, as the fiscal 2024 federal deficit came in at $1.8 trillion or about $400 billion greater than the anticipated deficit at the beginning of the year. That $400 billion is significant extra stimulus that leads directly to greater demand for goods and services. How likely is it that the fiscal deficit for 2025 will be any smaller?

I believe that there are many more uncertainties that could lead to higher inflation. The geopolitical risks that reside on multiple fronts seem to have been buried at this time. Any one of those conflicts – Russia/Ukraine, Israel/rest of the Middle East, and China/Taiwan – could produce inflationary pressures, even if it just results in the US increasing the federal budget deficit to support our allies.

If just sticking one’s finger in the air doesn’t help us solve our current confusion, there is always this strategy:

10.08.24
by

Milliman: Corporate Pension Funding Weakens in September

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

Milliman has released the latest results for the Milliman 100 Pension Funding Index (PFI). This index reviews the funding status each month of the top 100 U.S. corporate pension plans. The report indicated that the funded ratio declined to 102.4% at month-end from 102.6% at the end of August. Plan assets increased as a result of a 1.74% investment gain, but the discount rate declined by 0.14% to 4.96%. As a result, the growth in liabilities eclipsed asset growth leading to a $12 billion loss in funded surplus.

Assets for these combined plans now total $1.36 trillion as of September 30, while the projected benefit obligation is now $1.33 trillion giving these 100 corporate plans a $29 billion surplus. According to Zorast Wadia, author of the PFI, the current discount rate at 4.96% marks the first time since April 2023 that the rate hasn’t been >5.0%. However, so far in October we’ve witnessed a fairly significant move up in rates. If this trend continues, we could see the funded ratio for this index once again rising if the increase in rates doesn’t negatively impact the asset side of the pension equation.

10.08.24
by

We Suggested That It Might Just Be Overbought

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

Regular readers of this blog might recall that on September 5th we produced a post titled, “Overbought?” that suggested that bond investors had gotten ahead of themselves in anticipation of the Fed’s likely next move in rates. At that time, we highlighted that rates had moved rather dramatically already without any action by the Fed. Since May 31, 2024, US Treasury yields for both 2-year and 3-year maturities had fallen by >0.9% to 9/5. By almost any measure, US rates were not high based on long-term averages or restrictive.

Sure, relative to the historically low rates during Covid, US interest rates appeared inflated, but as I’ve pointed out in previous posts, in the decade of the 1990s, 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. I mention the 1990s because it also produced one of the greatest equity market environments. Given that the current yield for the US 10-year Treasury note was only 3.74% at that point, I suggested that the present environment wasn’t too constraining. In fact, I suggested that the environment was fairly loose.

Well, as we all know, the US Federal Reserve slashed the Fed Funds Rate by 0.5% on September 18th (4.75%-5.0%). Did this action lead bond investors to plow additional assets into the market driving rates further down? NO! In fact, since the Fed’s initial rate cut, Treasury yields have risen across the yield curve with the exceptions being ultra-short Treasury bills. Furthermore, the yield curve is positively sloping from 5s to 20s.

Again, managing cash flow matching portfolios means that we don’t have to be in the interest rate guessing game, but we are all students of the markets. It was out thinking in early September that markets had gotten too far ahead of the Fed given that the US economy remained on steady footing, the labor market continued to be resilient, and inflation, at least sticky inflation, remained stubbornly high relative to the Fed’s target of 2%. Nothing has changed since then except that the US labor market seems to be gaining momentum, as jobs growth is at a nearly 6-month high and the unemployment rate has retreated to 4.1%.

There will be more gyrations in the movement of US interest rates. But anyone believing that the Fed and market participants were going to drive rates back to ridiculously low levels should probably reconsider that stance at this time.

10.07.24
by

Ryan ALM, Inc. 3Q’24 Pension Monitor

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

We are pleased to share with you the Ryan ALM, Inc. Q3’24 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 each November.

With regard to Q3’24, Public Pension funds (4.9%) outperformed Corporate Pension plans (3.6%) by 1.3% net of liability growth, as public pension plans had a much greater exposure to US equities (21.9%) versus Corporates (12.6%). The S&P 500 continues to produce exceptionally strong returns in this uncertain environment. From a liability standpoint, the ASC 715 discount rates (+4.6%) marginally trailed liability growth for both public and multiemployer plans that operate under GASB accounting rules using the ROA.

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