Ron Ryan is an expert in pension matters as they relate to the liability side of the equation. Ron will be participating in a webinar tomorrow.  It is a great opportunity to invest a small amount of time to potentially gather tremendous value add.  I would encourage you to participate. If you can’t, I will be happy to get you his presentation upon request.

The details on how to register follow:

Convergex Plan Sponsor Services is committed to helping clients stay informed on important industry issues while building relationships with key industry contacts. In that regard, we’d like to you invite you to attend an upcoming webinar with Ronald Ryan, founder of Ryan ALM, an asset and liability management firm.

Join Our Twenty Minute Webinar with
Pension Expert and Ryan ALM Founder
Ronald Ryan

Host: Ronald Ryan, Founder of Ryan ALM
Date: Wednesday, October 21st
Time: 11:30am ET

REGISTER NOW
Convergex understands the critical importance for pension plan clients to be able to fund liabilities at stable and lower contribution costs. We also know that many of our clients are interested in de-risking their plans. This webinar will highlight how Ryan ALM’s offerings can help with these and other challenges.

About the Host
Ronald Ryan, founder of Ryan ALM, is an award winning pension expert who has been working with pension clients since 1977. His new book “The U.S. Pension Crisis” won the 2014 Independent Publisher Book Award Gold Medal in the Finance, Investments, and Economics category. Ryan designed the bond index benchmark, currently known as the Barclays Aggregate Index, while he was Director of Fixed Income Research at Lehman Brothers. His career efforts also won him the William F. Sharpe Indexing Lifetime Achievement Award.

Ryan ALM Offering
Ryan ALM offers the following products and services to pension plan clients:
For Public and Taft-Hartley Plans – Ryan ALM provides its proprietary Custom Liability Index (CLI), designed to be the proper pension benchmark for liability driven objectives, and its Liability Beta Portfolio (LBP), designed to de-risk a plan through a proprietary method of cash flow matching liabilities. According to Ryan/OMNI, this creates an opportunity to de-risk a plan while reducing costs by as much as 10%.
For Corporate Plans, in addition to the CLI and LBP, Ryan ALM provides a set of discount rates that conforms to ASC 715 and is used by a ‘Big 4’ accounting firm, according to Ryan ALM.

REGISTER HERE

I was very fortunate to spend the last three days at the Florida Public Pension Trustees Association’s (FPPTA) educational conference listening to many bright, passionate presenters. If you’ve attended one of these before you wouldn’t be surprised to read that there were roughly 90 presentations on various investment strategies, actuarial related sessions, fiduciary standards, communication, healthcare, performance measurement, and even a couple on a DB plan’s liabilities (amen). But, the most common theme was related to the plan’s ROA or return on asset assumption, that is used to both discount liabilities and as a target for the plan’s assets. Through our research and based on what was shared at the conference, it appears that 7.5% is the most common target for the plan’s ROA.

Given recent volatility in and poor performance of the global markets, the performance for the most common indexes is flat to negative for the 12 months ending September 30, 2015. In fact, one would have to be making a meaningful style overweight favoring growth versus value (in all capitalization ranges) to see reasonably positive numbers of 2% or more or an over-weighting in fixed income relative to equities to accomplish the same objective (Barclays U.S. Aggregate is up 2.94% for the last 12 months). But, we know that public DB plans have been reducing fixed income exposure with the anticipation of rising interest rates.

It is doubtful that a “traditional” 60 / 40 (equity / fixed income) allocation is representative of today’s asset allocation, but if it were, it would show a 0.81% return for the 12 months, falling substantially behind the average ROA. If we used an equity allocation that included non-US equities at a 10% allocation, the 12-month return falls to 0.21%. However, it certainly seems to us that many plans have taken their international allocation up, while also diversifying into emerging markets. If the plan allocated only 5% of the domestic equity to emerging markets, so that the new allocation was 45% US equity, 10% Int’l – developed, 5% Int’l – emerging and 40% fixed Income, the return falls to -3% for the year, as emerging markets have gotten destroyed, a full 10.5% behind the “average” ROA.

Unfortunately, as yields on bonds fell below the ROA in the late ‘90s and early 2000s, asset consultants began reducing allocations to fixed income, fearing that any allocation would prove to be a drag on the plan’s ability to achieve the ROA. As a result, most public fund DB plans have substantially less in domestic fixed income than they should or historically have had. Once again, it appears to us that most plans have less than 25% allocated to traditional U.S. fixed income. If this is correct, it is likely that the performance numbers highlighted above would be weaker.

Compounding the fact that most plans will have a total fund performance that falls substantially below their ROA objective during this period, is liability growth, which during the last 12 months has increased by 9.6% (according to Ryan ALM). As we discussed at the conference, a plan’s specific liabilities should be the primary objective for performance reviews, but regrettably that hasn’t proven to be the case. Comparing your assets to your plan’s liabilities in 2015 would reveal a nearly 12.6% underperformance in the last 12 months.

DB Plan sponsors have been very pleased with returns relative to their stated ROA objective since the great financial crisis concluded in March 2009, but the reality is that liability growth has outpaced most plans’ asset growth during the same period. However, this fact is mostly unknown since most plans don’t get regular updates on their fund’s liabilities.  Unless a fund sponsor has access to a custom liability index (CLI) measuring the performance of the plan’s specific liabilities there is no way to know that fact.

Asset Allocation should be driven by your plan’s liabilities and funded ratio, and not the ROA. Asset allocation should also be responsive to changes in both, but in order to implement a responsive asset allocation, one needs greater transparency on the liabilities. Let us help you understand the true economics of your plan.

I had the great pleasure to attend Ron Ryan’s presentation yesterday at the Florida Public Pension Trustees Association (FPPTA) Conference in Naples, FL.  As many of you know, Ron is a pioneer in indexing dating back to his days when he was the Head of Research for Lehman, and he and his team created the Lehman Aggregate index and its component pieces (sub indexes).

Ron’s firm today, Ryan ALM, is focused on securing the promises made (liabilities) within defined benefit plans.  Both he and I are trying to refocus the industry on why paying greater attention to a plan’s liabilities helps plan sponsors do a better job of creating a more sound investment structure and asset allocation.

Getting a better feel for the liabilities doesn’t mean spending more time understanding the output from one’s annual actuarial report.  It does mean using a tool, such as a custom liability index (CLI) to measure the interest rate sensitivity, growth rate and term structure of the plan’s liabilities.  With this information, plan sponsors can begin to take risk off when it is appropriate to do so, and conversely, become more aggressive when the need arises.

As an industry we have spent an inordinate amount of time focused exclusively on the return on asset assumption (ROA), and not nearly enough time, if any, on the liabilities, which is the only reason that the plan exists in the first place. Asset allocation should reflect the funded ratio and funded status of the DB plan. A 90% funded plan should have a very different asset allocation and risk profile from that of a 50% funded plan.  How are your liabilities performing in this environment?

How To DeRisk A Pension 151004

We are pleased to share with you the latest article in the KCS Fireside Chat series. In this article we once again explore the burgeoning ETF business, but with a particular focus on the trading activity that occurred on August 24th.  As you may recall, the market plummeted at the open (Dow down roughly 1,100 in first five minutes), and the impact on several ETFs was incredible.  We hope that you find the article helpful.  Please don’t hesitate to reach out to us if we can provide any assistance.

Click to access KCSFCOct15.pdf

We are pleased to share with you the latest KCS Fireside Chat article. Social Security has just turned 80, and in this article we explore its origins, operating practices, and importantly, its future. We hope that you find this subject interesting.

Click to access KCSFCSep15.pdf

As a nation we cannot afford to have our seniors living on the precipice of financial ruin. A return to the poor houses of the 20’s and 30’s is absolutely unacceptable. Ideally, we would once again provide a strong pension system that would strengthen the three-legged stool, but until we can resurrect defined benefit pensions for the masses, we better figure out a way to continue to provide, and even enhance, the current Social Security system.

Please don’t hesitate to reach out to us if we can be of any assistance to you. Have a great Labor Day weekend!

The following is a re-introduction of a concept that we shared with you in June.

I’ve witnessed many market declines during my more than 33 years in the investment industry, and I would be lying if I told you that I called the beginning, end, and ultimate magnitude of any of the sell-offs.  Market declines are part of the investing game.  But just knowing that isn’t enough, as unfortunately, they can have a profound impact on retirement plans and retirement planning, both institutional and individual, as they impact the psyche of the investors.

It is well documented how individuals tend to buy high and sell low. The market crash of 2007 – 2009 drove many individuals out of equities at or near the bottom, and many of those “investors” have kept their allocations to equities below 2007 levels. It hasn’t been that much better for the average institutional investor either.  We are aware of a number of situations (NJ for one) that plowed into expensive, absolute-return product at the bottom of the equity market only to see that portfolio dramatically underperform very inexpensive beta, as the equity markets rallied from the bottom in March 2009.

In some cases, the selling “pressure” was the result of liquidity needs, which lead to the tremendous explosion in the secondary markets for private equity, real estate, etc. in 2009.  The E&F asset allocation model, made so famous by Yale, was the undoing for many retirement plans, as the failure to secure adequate liquidity exacerbated market losses.  Given the heightened fear and volatility in the global markets, are you currently prepared to meet your liquidity needs?

As we’ve discussed within both the Fireside Chats and on the KCS blog, the development of a hybrid asset allocation model geared specifically to your plan’s liabilities, can begin to de-risk your plan, while dramatically improving liquidity.  The introduction of the beta / alpha concept will provide plan sponsors with an inexpensive cash matching strategy that meets near-term benefit needs, while extending the investing horizon for the less liquid investments in your portfolio. By not being forced to sell into the market correction, your investments have a greater chance of rebounding when the market settles.

Traditional asset allocation models subject the entire portfolio to market movements, while the beta / alpha approach only subjects the alpha assets to volatility.  But, since one doesn’t have to sell alpha assets to meet liquidity needs given that the beta portfolio is used for that purpose, the volatility doesn’t matter. Don’t fret about China, Oil and / or emerging markets and the potential implications for the global markets and your plan. Let us help you design an asset allocation that improves liquidity, extends the investment horizon for your alpha assets, and begins to de-risk your plan, as the funded ratio and status improve.