By: Ron Ryan, CFA, CEO, Ryan ALM, Inc.

Most pension investments are focused on earning Alpha… defined as a positive return difference between the investment and its objective (usually an index benchmark). Each asset class and its subsets seem to have an index benchmark today. Monthly risk/reward measurements of the asset return behavior are compared to the index benchmark return behavior as a strict discipline to monitor that Alpha is being earned with an appropriate risk behavior. All of this ends up in a rigorous and time-consuming review by the pension consultant with the plan sponsor.

If the true objective of a pension is to secure benefits in a cost-efficient manner with prudent risk… then where are the liabilities in this review? Liabilities behave like bonds since they are priced with a discount rate. As a result, liability growth (return) can be volatile with a high positive or even negative annual growth rate. Comparing the annual growth rate of assets to the annual growth rate of liabilities is a required annual accounting and actuarial practice. This will determine the funded ratio, funded status, contribution cost as well as pension expense. In the end it is the growth rate of assets versus the growth rate of liabilities that count… this is where liability Alpha is calculated.

All of the pension assets can outperform their index benchmark and create market Alpha but unless this asset allocation creates liability Alpha…the pension plan loses! This will result in a lower funded ratio and status as well as higher contribution costs. Pensions are all about assets versus liabilities cash flows and growth rates (returns). Most important is that the asset cash flows match and fund with certainty the liability cash flows. This is a future value calculation and can only be implemented with a cash flow matching strategy using bonds. The present value growth rate (return) of assets versus liabilities is also important as it affects the accounting and actuarial calculations mentioned earlier. The focus here should be earning liability Alpha.

Since the liability growth rate is not a common or frequent calculation, the Ryan team invented a Custom Liability Index (CLI) in 1991  as the proper benchmark for asset liability management (bonds) or even total asset allocation. Our CLI is a monthly report providing  all of the calculations and data needed to monitor the risk/reward behavior of liabilities. Our CLI will allow for the pension consultant and plan sponsor to easily calculate if the plan has earned liability Alpha.

The Ryan ALM cash flow matching model (Liability Beta Portfolio™ or LBP) will fund benefits chronologically with certainty. Our LBP will outyield liabilities (if discount rate = ASC 715) thereby also providing liability Alpha. As a result, our LBP can achieve both the future value and present value goals of fully funding benefits in a cost effective manner while earning liability Alpha.

“Given the wrong index(s)… you will get the wrong risk/reward” – Confucius

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

The four senior team members at Ryan ALM, Inc. have collectively more than 160 years of pension/investment experience. We’ve lived through an incredible array of markets during our tenures. We have also witnessed many attempts on the part of Pension America to try various schemes to meet the promises that have been made to the pension plan participants. Regrettably, defined benefit (DB) pension plans continue to be tossed aside by corporate America in favor of defined contribution (DC) plans. Both public and multiemployer plan sponsors would be wise to adopt a strategy that seeks more certainty in order to protect and preserve these critically important retirement vehicles before they are subject to a similar fate.

We’ve compiled a list of “Pension Truths” that we believe return the management of pension plans back to its roots when “SECURING the promised benefits at a reasonable cost and with prudent risk” was the primary objective. The dramatic move away from the securing of benefits to the arms race focused on the return on asset assumption (ROA) has eliminated any notion of certainty in favor of far greater variability in likely outcomes. Here are the Ryan ALM DB Truths:

• Defined Benefit (DB) plans are the best Retirement vehicles.

• They exist to fulfill a financial promise that has been made to the plan participant upon retirement.

• The primary objective in managing a DB plan is to SECURE the promised benefits at a reasonable cost and with prudent risk.

• The promised benefit payments are liabilities of the pension plan sponsor.

• Liabilities need to be measured, monitored, and managed more than just once per year.

• Liabilities are future value (FV) obligations – a $1,000 monthly benefit is $1,000 no matter what rates do. As a result, they are not interest rate sensitive.

• Plan assets (stocks, bonds, real estate, etc.) are Present Value (PV) or market value (MV) calculations. We do not know the FV of assets except for bonds at maturity.

• In order to measure and monitor the funded status, liabilities need to be converted from FV to PV – a Custom Liability Index (CLI) is absolutely needed.

• A discount rate is used to create a PV for liabilities – ROA (publics), ASC 715 (corps), STRIPS, etc.

• Liabilities are bond-like in nature. The PV of future liabilities rises and falls with changes in the discount rate (interest rates).

• The nearly 40-year decline in US interest rates beginning in 1982 crushed pension funding, as the growth rate for future liabilities far exceeded the growth rate of the PV of assets.

• The allocation of plan assets should be separated into two buckets – Liquidity (beta) and Growth (alpha).

• The liquidity assets should consist of a bond portfolio that matches (defeases) asset cash flows with the plan’s liability cash flows (benefits and expenses (B&E)).

• This task is best accomplished through a cash flow matching (CFM) investment process.

• The liquidity assets should be used to meet B&E chronologically buying time for the alpha assets to grow unencumbered to meet future liabilities.

• The Growth assets will consist of all non-bonds, which can now grow unencumbered, as they are no longer a source of liquidity.

• The pension fund’s asset allocation should be driven by the plan’s funded status.

• As the funded status improves, port alpha (profits) from the growth portfolio into the liquidity bucket (de-risk) extending the cash flow matching assignment and securing more promises.

• This de-risking ensures that plans don’t continue to ride the asset allocation rollercoaster leading to volatile contribution costs.

• DB plans are a great recruiting and retention tool for managing a sponsor’s labor force.

• DB plans need to be protected and preserved, as asking untrained individuals to fund, manage, and then disburse a “retirement benefit” through a Defined Contribution plan is a poor policy and it is failing miserably.

• Unfortunately, doing the same thing over and over and… is not working. A return to pension basics is critical.

You’ve made a promise: measure it – monitor it – manage it – and SECURE it…   

Get off the pension funding rollercoaster – sleep well!

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

We are pleased to once again provide you with an update on the PBGC’s activity related to the ARPA legislation. During the previous week there were four plans that submitted applications. Each of these funds resided on the PBGC’s Waiting List. Three of the plans had no priority grouping associated with them, while the UFCW – Northern California Employers Joint Pension Plan identified itself as a Priority Group 6 member.

In addition to the UFCW plan, applications were submitted by Central New York Laborers’ Pension Plan, Retail Food Employers and United Food and Commercial Workers Local 711 Pension Plan, and the CWA/ITU Negotiated Pension Plan. Collectively, these four plans are seeking Special Financial Assistance (SFA) totaling $2.9 billion, of which the UFCW – Northern California plan is asking for $2.3 billion, for the 189,195 plan participants. As a reminder, the PBGC has 120 days from submission to act on the application.

There were no applications approved, denied, or withdrawn. In addition, there were no plans added to the PBGC’s Waiting List, which continues to have 110 funds on the list, with 10 of those having been “invited” by the PBGC to submit. Of the 110 wait list candidates, 108 have locked in their valuation date.

There are currently eight funds that have had the SFA applications approved that are still awaiting the distribution of funds from the PBGC totaling $3.7 billion that will support the retirements of >160K participants.

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

We are pleased to share with you the Ryan ALM, Inc. 2Q’23 Newsletter. As usual, you will find unique perspectives on a variety of asset/liability measures. In addition, we share with you our Pension Monitor, interesting and current research, multiple blog posts, and economic statistics that will highlight the current market influences on Fed policy, which continues to be the major market driver at this time.

The current US rate environment is providing the plan sponsor community with a very attractive opportunity to reduce risk within their portfolios through cash flow matching. Please don’t hesitate to reach out to us if we can be of any help to you as you explore your de-risking options.

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

Yogi Berra may or may not have actually said the words in the title of this post, which were supposedly uttered during the New York Mets pennant run in 1973, but that phrase is perfect for describing today’s inflationary environment. There has been great progress in driving down the headline inflation as measured by the CPI, which now stands at 3% having peaked at >9% in 2022. However, core inflation, which measures the change in prices of goods and services, except for those from the food and energy sectors, may just prove to be more challenging. Core inflation currently sits at 5%, a level that far exceeds the 2% target established by the Federal Reserve before they declare victory.

One of the key factors contributing to the Fed’s success in driving down the CPI has been the significant fall in the price of oil. As you may recall, the price of a barrel of WTI crude oil peaked on June 6, 2022 at $120.67. It currently resides (10:03 am EST) at $76.52 which is a fall of -36.6%. Since petrochemicals derived from oil and natural gas are used in the production of >6,000 everyday products, this significant decline in the price of oil obviously goes a long way to mitigating inflation. But, one must ask, has the price of oil peaked and will the slide in price continue or will OPEC and other factors potentially disrupt this favorable trend?

There recently has been an uptick in the price of WTI, which stood at $70.64 on June 30, 2023. At $76.52 today, WTI is up 8.3% MTD. I mention this trend because bond investors seem to think that the Fed has accomplished everything that it set out to do when it first increased the Fed Funds Rate on March 17, 2022. The subsequent 10 rate increases have meaningfully addressed inflation, but as we witnessed in the 1970s, declaring victory prematurely can bring about a swift reversal of fortune.

This recent price movement in oil may just be a temporary blip in the trend of falling prices, but it may not be, too. If in fact inflation is pushed higher because of the impact from a rising crude oil price, will the Fed be forced to push US interest rates higher for longer? The market’s recent bond rally will certainly be challenged should that be the case. Again, we ask, do pension plan sponsors and their advisors want to be in the game of guessing where rates are going? US interest rates are now at a level that we haven’t seen in about 15 years.

Use the higher rates to secure a portion of your benefits and expenses chronologically. Improve the liquidity needed to meet those obligations. While achieving greater certainty regarding the plan’s liquidity, you are also extending the investing horizon for the plan’s growth assets. Bonds should be used for their certain cash flows of interest and principal. They are not performance drivers. Match those cash flows against the pension system’s liabilities. You will no longer need to worry about US interest rate policy. That’s comforting!

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

As I mentioned in a previous post, I spent the last three days attending and speaking at the latest Opal Public Fund Summit in Newport, RI. I always find these events to be incredibly helpful and often wonder why conferences such as this are not better attended. Trustee education is so critical to our collective ability to protect and preserve defined benefit plans.

Despite spending the last 41+ years in the pension/investment industry, I try to attend as many of the sessions on the agenda as possible. I like to learn from plan sponsor trustees, consultants, actuaries, and the investment management community what they are focused on and why. I benefit tremendously from their willingness to share. It doesn’t mean that I agree with everything, but that is incredibly useful, too.

In fact, I was very surprised to hear a senior consultant from a major US asset consulting firm say that the current US rate environment wouldn’t have them change the asset allocation because the rate increases might be fleeting, and you can’t lock up the current 5% to 5.5% rate. Really? Sorry, but you absolutely can lock in the current higher US interest rates. It is called defeasance, and the strategy of cash flow matching (CFM) has been in existence for many, many decades. Just look at insurance companies and lottery systems. When you implement a cash flow matching strategy you have secured a certain cash flow of semi-annual interest payments and principal payments at the yield you purchased. No matter where interest rates go in the future, you have secured the certainty of these cash flows.

Pension America should be looking to take risk out of their DB plans. They should be trying to lock in these higher rates for a least a portion of their assets (liquidity). As a pension community, we blew it in the early 1980s and again throughout the ’90s, when the average pension plan was either over-funded or had an interest rate environment that was presenting a “once-in-a lifetime” gift of double-digit rates. Opportunities to SECURE the promised benefits were forfeited then, and it would be a travesty to witness another opportunity blown.

As a reminder, when a plan sponsor hires a cash flow matching specialist, such as Ryan ALM, Inc., to build and manage a defeased bond portfolio the plan’s assets and liabilities are matched for that portion of the portfolio. Changes in the interest rate environment have no impact on that portion of the portfolio. The funding cost savings is secured and the impact of a changing rate environment is mitigated. So, YES, you can lock in these attractive US interest rates at this time!

We, at Ryan ALM, don’t forecast interest rates. We don’t want to be in that game and you shouldn’t want to risk your pension benefit payments on interest rate speculation either. By engaging a CFM manager, you build certainty into your portfolio where traditional asset allocation frameworks create great uncertainty. You have no idea where equity and bond markets will be in 12 months, let alone 5-10 years, but you will know through a cash flow matching strategy that your plan’s CFM assets will match the plan’s liability cash flows.

The primary objective in managing a pension plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. It isn’t about achieving the highest return, which only ensures greater volatility and not necessarily success. We’d welcome the opportunity to provide you and your board with greater knowledge of how risk can and should be reduced in this environment in a cost effective manner.

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

We are pleased to share with you the Ryan ALM, Inc. Pension Monitor for YTD 2023. As you will see, the differences among public and corporate funding results for the first 6 months of 2023 are far smaller than those experienced during 2022’s volatile year, when corporate plans outperformed public plans by an incredible 31.4%.

So far in 2023, corporate plans slightly underperformed public plans as US interest rate declines YTD had a marginal impact on private pensions that operate under FASB accounting standards. In addition, asset allocation differences in exposures to both public bonds and equities further contributed to the 2.4% outperformance of public plans versus corporate plans. Public pension plans have much more modest exposures to fixed income and far greater exposure to public equities vis a vis an average corporate asset allocation structure. With US equities, as measured by the S&P 500 up nearly 17% YTD, public plans have captured more of that return.

As always, please don’t hesitate to reach out to you with any of your questions or visit RyanALM.com to see the plethora of research that we’ve produced for your benefit.

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

I’ve been enjoying my time at the Opal Public Funds Summit East conference in Newport, RI. Day two has been illuminating, especially as it relates to real estate and the lack of liquidity available from “open-end” funds. One of the plan sponsors that I spoke with has been waiting on a queue for 10 months at this time with no information on when the first distribution may become available.

As we at Ryan ALM, Inc. have mentioned many times, current asset allocation models within DB plans have significantly impacted the availability of liquidity to meet monthly benefits and expenses by migrating significant plan assets to alternative investments, including real estate, without a formal plan to meet ongoing liquidity needs. We believe that having all of a plan’s assets focused on the return on assets (ROA) assumption is the wrong approach. Plan sponsors and their advisors should bifurcate the asset base into two buckets – liquidity and growth.

The liquidity bucket should be a defeased bond portfolio through a cash flow matching (CFM) strategy focused on near-term liabilities chronologically, while the growth bucket can be invested as aggressively as allowed by the IPS with a much longer investing horizon as it will no longer be a source of liquidity. The rising US rate environment is creating challenges for many aspects of our capital markets but a blessing for fixed income assets used as liquidity to fund benefits + expenses. DB plans should be striving for less uncertainty by focusing more attention on the benefit promises that have been made to the participants and less on the potential return.

As a reminder, the only reason that these DB plans exist is to meet a benefit promise that has been made to the participants. Providing the necessary liquidity to meet those promises should be a major consideration. Bonds are not a return-seeking asset. They are the only asset with a known cash flow (terminal value + contractual interest payments). Use the certainty of those cash flows to SECURE the promised benefits. Everyone will sleep better at night!

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

The PBGC didn’t let a little holiday get in the way of some ARPA activity last week. According to the terrific spreadsheet that they update and provide weekly, three more plans received approval for SFA grant monies. These plans include, Automotive Industries Pension Plan (Priority Group 6), Western Pennsylvania Teamsters and Employers Pension Fund (PG 2), and the Retail Clerks Specialty Stores Pension Plan (PG 5). In total, these plans will receive $1.42 billion for their combined 46,076 plan participants. The Automotive plan will receive just over 76% of the total grant money.

In other ARPA news, the Retirement Benefit Plan of the Newspaper and Magazine Drivers, Chauffeurs and Handlers Union Local 473 (quite the mouthful) became the sixth plan on the waiting list to have their application reviewed. The PBGC has 120 days from July 5th (11/2/23) to complete its review of the SFA application. There remain 104 plans on the wait list.

The United Food and Commercial Workers (UFCW) Union and Participating Food Industry Employers Tri-State Pension Plan withdrew its application on July 3rd. This Priority Group 6 plan is seeking $651 million for their 29,233 participants.

I’ve mentioned that the Bakery Drivers Local 550 and Industry Plan remains the only applicant to be denied. Here is the letter from the PBGC explaining why this fund was not eligible to receive SFA grant money.

Lastly, the US interest rate environment continues to support the use of cash flow matching to ensure that the promised benefits and expenses stretch as far as possible within the SFA bucket. These sinking funds should not be investing in return seeking assets (RSA) as the purpose is to lock in the B&E coverage as far into the future as possible. As we’ve mentioned previously, the sequencing of returns is critically important to the success of this legislation. Now is not the time to take on risk. Save that for the legacy assets that now have time to grow unencumbered.

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

As a follow-up to the blog from Friday, Transamerica Center for Retirement Studies and Transamerica Institute released a retirement preparedness study this past Thursday. None of the four generations studied – Boomers, Gen X, Millennials, and Gen Z – are in good shape, but the Gen X folks are in the most dire situation. They are often referred to as the “sandwich” generation as a result of beginning their careers in the 80s and 90s when DB plans were being phased out and before DC plans were widely understood and offered.

According to the Transamerica study, only 17% of the Gen X cohort (born 1965-1980) believe that they are adequately prepared for retirement, and they are right based on the fact that the median retirement household savings is only $82,000 compared to Boomers at $289,000. Early Gen Xers are not to far off from beginning to “retire”, but can they?

I’m highlighting the Gen X group, but none of the four generational cohorts are in good shape. Somewhat surprising is the Boomers confidence level at only 21%, as many (not most) had exposure to a DB plan, while 27% of Millennials and 23% of Gen Z members feel prepared. That means that a whole lot of Americans (70+%) don’t feel that a retirement is in their futures, let alone a dignified one. So sad!