Tag Archives: Asset allocation

12.02.25
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Do the Analysis! Remove the Guess Work.

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

I am truly blessed working for an organization such as Ryan ALM, Inc. I am awed by the folks that I get to work with and the product/strategy that I get to represent. As a reminder, we’ve created a cash flow matching (CFM) strategy that brings an element of certainty to the management of pensions that should be welcomed by pension plan sponsors and their advisors far and wide. What other strategy can inform you on the day that the portfolio is constructed what the performance of that strategy will be for the full-term of the assignment (barring any defaults within investment grade bonds)? Name another strategy that can lay out the liquidity with certainty for each month (chronologically) of that assignment.

Given that liquidity is becoming a challenge as pension plans (mostly public) adopt a more aggressive asset allocation favoring alternative investments, using a CFM strategy that provides ALL the liquidity to meet ongoing benefits and expenses should be a decision that is easily embraced. Yet, our conversations with key decision makers often stall as other parties get involved in the “review”. To this day, I’m not sure what is involved in most of those conversations.

Are they attempting to determine that a traditional core fixed income strategy benchmarked to a generic index such as the BB Aggregate is capable of producing the same outcome? If so, let me tell you that they can’t and it won’t. Any fixed income product that is not managed against your plan’s specific liabilities will not provide the same benefits as CFM. It will be a highly interest rate sensitive product and performance will be driven by changes in interest rates. Do you know where U.S. rates are headed? Furthermore, the liquidity provided by a “core” fixed income strategy is not likely to be sufficient resulting in other investment products needing to be swept of their liquidity (dividends and capital distributions), reducing the potential returns from those strategies.  Such a cash sweep will reduce the ROA of these non-bond investments. Guinness Global’s study of S&P data for the last 85 years has shown that dividends and reinvestment of dividends account for 50% or more of the S&P returns for rolling 10- and 20-year periods dating back to 1940.

Are they trying to determine if the return produced by the CFM mandate will be sufficient to meet the return on asset assumption (ROA)? Could be, but all they need to realize is that the CFM portfolio’s yield will likely be much higher than the YTM of a core fixed income strategy given CFM’s 100% exposure to corporate bonds versus a heavy allocation to lower yielding Treasuries and agencies in an Agg-type portfolio. In this case, the use of a CFM strategy to replace a core fixed income mandate doesn’t impact the overall asset allocation and it certainly doesn’t reduce the fund’s ability to meet the long-term return of the program.

Instead of trying to incorporate all these unknown variables/inputs into the decision, just have Ryan ALM do the analysis. We love to work on projects that help the plan sponsor and their advisors come to sound decisions based on facts. There is no guess work. Importantly, we will construct for FREE multiple CFM portfolios, if necessary, to help frame the decision. Each plan’s liabilities are unique and as such, each CFM portfolio must be built to meet that plan’s unique liability cash flows.

All that is required for us to complete our analysis are the projected liability cash flows of benefits and expenses (contributions, too) as far into the future as possible. The further into the future, the greater the insights that we will create for you. We can use the current allocation to fixed income as the AUM for the analysis or you can choose a different allocation. We will use 100% IG corporates or you can ask us to use either 100% Treasuries/STRIPS or some combination of Treasuries and corporate bonds. We can defease 100% of the plan’s liabilities for a period of time, such as the next 10-years or do a vertical slice of a % of the liabilities, such as 50%, which will allow the CFM program to extend coverage further into the future and benefit from using longer maturity bonds with greater YTMs. Isn’t that exciting!

So, I ask again, why noodle over a bunch of unknowns, when you could have Ryan ALM provide you with a nearly precise evaluation of the benefits of CFM for your pension plan? When you hire other managers in a variety of asset classes, do they provide you with a portfolio up front? One that can give you the return that will be generated over a specific timeframe? No? Not surprised. Oh, and BTW, we provide our investment management services at a significantly lower fee than traditional core fixed income managers and we cap our annual fee once a certain AUM is reached. Stop the guess work. Have us do the work for you. It will make for a much better conversation when considering using CFM. Call me at 201/675-8797 or email me at rkamp@ryanalm.com for your free analysis. I look forward to speaking with you!

11.19.25
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It Couldn’t Be Any Easier!

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

I participated this morning in a portfolio review for one of our Cash Flow Matching (CFM) clients. As usual, it couldn’t be any easier for us and the client. Following the Chair’s announcement that it was Ryan ALM’s turn, I stated that all benefits and expenses remain SECURED on a net of contributions basis through 2048 and gross of contributions through 2056. Any questions? That’s it!

There is no guessing as to the future. There is no hand-wringing or pondering regarding the Fed, and what they might do at their next meeting in December. No worries about equity valuations, the impact of AI, the increase in the use of PIKs in private credit portfolios, etc. We built this portfolio in the third quarter of 2024, and it continues to do exactly what it was designed to do. The combination of maturing principal and interest is providing the necessary asset cash flows to meet monthly distributions (liability cash flows of benefits and expenses) like clock-work. How comforting!

The only potential fly in the ointment is a default of an investment grade bond. But according to S&P, that happens at a 0.18% annual clip or roughly 2 / 1,000 bonds (last 40-years). Fortunately for us and our client this has not happened within their portfolio. So, as long as the monthly cash on hand remains greater than the required distribution, we are meeting the requirements of our mandate.

There is no anxiety associated with our management of pension assets. Only an element of certainty rarely found within pension management. How many of your other managers can provide a summary as concise as ours? How many of your managers have built a strategy where the performance for the length of the mandate (5-, 10-, or more years) is known on the day the portfolio is constructed? When we talk about CFM as a “sleep-well-at-night” strategy, this is precisely what we are talking about. Why wouldn’t you want some of this in your fund?

As a reminder, through CFM the liquidity is enhanced, the benefits (promises) SECURED, the investing horizon extended for the non-CFM assets, and certainty established for that portion of the portfolio. Seems like a no brainer.

11.19.25
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I’m Confused??

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

I’ve had the great pleasure of speaking at a number of conferences and events this year. Thank you to those of you who provided me with these opportunities. Regular readers of this blog know that I’ve been discussing the concept of uncertainty and specifically how human beings really despise this state of being.

In the prior two weeks I’ve spoken at both NCPERS in Fort Lauderdale, FL, and at the IFEBP in Honolulu, HI, where I had the opportunity to discuss Cash Flow Matching (CFM) as part of a broader ALM conversation. In both cases I asked the audience, one primarily public fund sponsors (NCPERS) and the other multiemployer, if they could point to any part of their DB pension plan that brought certainty. Not surprisingly, not one hand was raised.

I then commented that if humans, including plan sponsors of DB pension plans, hated uncertainty, why were they continuing to live with the uncertainty imbedded in their current asset allocation structures? These asset allocations place plan sponsors and the plan’s participants on the performance rollercoaster driven by the whims of the markets, which shouldn’t be comfortable for anyone.

So, I ask once more: if folks hate uncertainty and they have the chance to bring a level of certainty into the management of pension plans through CFM, why haven’t they done so? Do they still believe that managing a pension plan is all about generating the ROA? Do they believe that their plan is sustainable (perpetual), so the swings in funded status don’t matter? Do they not worry about where liquidity is going to be derived despite the significant push into alternatives that are sapping plans of liquidity? These are just a few questions for which answers must be furnished. Without an appropriate answer the practice must stop.

A carefully constructed (optimized) CFM program established with IG bonds will SECURE the promises, enhance and provide the necessary liquidity (chronologically), extend the investing horizon for the non-bond assets that can now just grow, and in the process provide the plan sponsor and their members with a “sleep-well-at-night” strategy that is far more certain than anything that they are currently using. We recognize that change isn’t easy, but it is sure better than riding the proverbial performance rollercoaster with the accompanying unknown climbs and dramatic falls.

11.17.25
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ARPA Update as of November 14, 2025

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

I hope that last week was great for you. I didn’t recognize anyone from the PBGC at the IFEBP in Honolulu last week, but I suspect that there must have been a few attendees. Why? Well, for the first time that I can recall since I began producing these weekly updates, there is nothing to report in terms of the PBGC’s implementation of the ARPA pension legislation. NOTHING!

Now, I’m sure that a lot is going on behind the scenes, especially given the announcement that Janet Dhillon has been confirmed as the 17th Director of the Pension Benefit Guaranty Corporation, but in the weekly update produced as of Friday, November 14th, there were no applications submitted, as the PBGC’s e-Filing portal remains temporarily closed. No pension plans received approval for SFA nor were any denied. There were no withdrawals of previously submitted applications. Lastly, there were no multiemployer plans asking to be added to the growing waitlist.

As we get closer to the legislation’s deadline for new applications to be submitted, we are down to about 6-7 weeks until December 31, 2025. Having a week in which nothing concrete was reported reduces the odds that most of those plans yet to file will actually be given that opportunity.

The graph above reflects the activity through November 7th. Despite the lack of activity last week, the PBGC deserves high praise for their handling of this critical legislation that has helped som many American workers and pensioners. Lastly, at the IFEBP was asked to touch on ARPA/SFA and how best to incorporate ALM strategies to mitigate risk. I’ve had the privilege to speak on this topic numerous times. In summation, the allocation of Special Financial Assistance (SFA) to multiemployer plans is truly of gift. That allocation is not likely to ever be repeated. As such, plans should take every precaution to ensure the maximum coverage of benefits (and expenses) while minimizing the risk through their investments. Call on us (ryanalm.com) if we can help you think through the use of Cash Flow Matching to SECURE those promises.

11.17.25
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The Times They Are A-Changin’

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

Thank you, Bob Dylan, for the lyric that is just perfect for this blog post. I have just returned from the IFEBP conference in Honolulu, HI. What a great conference, and not just because it was in Hawaii (my first time there). If it wasn’t the location, then what made this one so special? For years I would attend this conference and many others in our industry and never hear the word liability mentioned, as in the pension promise, among any of the presentations.

So pleased that during the last few years, as U.S. interest rates have risen and defined benefit pension funding has improved, not only are liabilities being discussed, but more importantly, asset allocation strategies focused on pension liabilities are being presented much more often. During this latest IFEBP conference there were multiple sessions on ALM or asset allocation that touched on paying heed to the pension plan’s liabilities, including:

“Asset Allocation for Today’s Markets”

“My Pension Plan is Well-Funded – Now What?”

“Asset Liability Matching Investment to Manage the Risk of Unfunded Liabilities”

“Decumulation Strategies for Public Employer Defined Contribution Plans” (they highlighted the fact that these strategies should be employed in DB plans, too)

“Applying Asset Liability Management Strategies to Your Investments” (my session delivered twice)

“Entering the Green Zone and Staying There”

These presentations all touched on the importance of risk management strategies, while encouraging pension plan sponsors to stop riding the performance rollercoaster. Given today’s highly uncertain times and equity valuations that appear stretched under almost any metric, these sessions were incredibly timely and necessary. Chasing a performance objective only ensures volatility. That approach doesn’t guarantee success. On the other hand, securing the pension promise through an ALM strategy at a reasonable cost and with prudent risk does redefine the pension objective appropriately.

I know that human beings are reluctant to embrace change, but we despise uncertainty to a far greater extent. Now is the time to bring an element of certainty to the management of pension assets. By the way, that was the title of my recent presentation to public funds at the NCPERS conference in Fort Lauderdale. Again, understanding pension liabilities and managing to them is not new, but it has certainly been under a bigger and brighter spotlight recently. That is great news!

11.06.25
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You Don’t Say!

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

Morgan Stanley has published the results from their Taft-Hartley survey, in which they have to provided “insights into how Taft-Hartley plans are managing priorities and navigating challenges to strengthen their plans”. I sincerely appreciate MS’s effort and the output that they published. According to MS, T-H plans have as their top priority (67% of respondents) delivering promised benefits without increasing employer’s contributions. That seems quite appropriate. What doesn’t seem to jive with that statement is the fact that only 29% that improving or maintaining the plan’s funded status was important. Sorry to burst your bubble plan trustees, but you aren’t going to be able to accomplish your top priority without stabilizing the funded status/ratio by getting off the performance rollercoaster.

Interestingly, T-H trustees were concerned about market volatility (84%) and achieving desired investment performance while managing risk (69%). Well, again, traditional asset allocation structures guarantee volatility and NOT success. If you want to deliver promised benefits without increasing contributions, you must adopt a new approach to asset allocation and risk management. Doing the same old, same old won’t work.

I agree that the primary objective in managing a DB plan, T-H, public, or private, is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is not a return game. Adopting a new asset allocation in which the assets are divided among two buckets – liquidity and growth, will ensure that the promises (monthly benefits) are met every month chronologically as far into the future that the assets will cover delivering the promised benefits. However, just adopting this bifurcated asset allocation won’t get you off the rollercoaster of returns and reduce market volatility. One needs to adopt an asset/liability focus in which asset cash flows (bond interest and principal) will be matched against liability cash flows of benefits and expenses.

This approach will significantly reduce the volatility associated with markets as your pension plan’s assets and liabilities will now move in lockstep for that portion of the portfolio. As the funded status improves, you can port more assets from the growth portfolio to the liquidity bucket. It will also buys time for the remaining growth assets to help wade through choppy markets. According to the study, 47% of respondents that had an allocation to alternatives had between 20% and 40%. This allocation clearly impacts the liquidity available to the plan’s sponsor to meet those promises. If allocations remain at these levels, it is imperative to adopt this allocation framework.

Furthermore, given today’s equity valuations and abundant uncertainty surrounding interest rates, inflation, geopolitical risk, etc., having a portion of the pension assets in a risk mitigating strategy is critically important. Thanks, again, to MS for conducting this survey and for bubbling up these concerns.

10.30.25
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Cash Flow Matching: Bringing Certainty to Pension Plans

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

Imagine a world, or at least the United States, where pension plans are no longer subject to market swings and the uncertainty those swings create. What if you could “guarantee” (outside of any corporate bond defaults) the promises made to your plan participants, ensuring their financial security with confidence? In today’s highly unpredictable investing environment, relying solely on the pursuit of investment returns is a risky ride—one that guarantees volatility and sleepless nights but not necessarily success. It’s time to rethink how we manage defined benefit (DB) pension plans and embrace a strategy that brings true certainty: Cash Flow Matching (CFM). Discover through the hypothetical conversation below how CFM can transform your investing approach, protect your plan, and deliver peace of mind for everyone involved. Let’s go!

Why are we talking about Cash Flow Matching (CFM) today?

First off, thanks for taking a few minutes to chat with me. As you may have heard me say before, our mission at Ryan ALM, Inc. is simple — to protect and preserve defined benefit (DB) pension plans and to secure the promises made to participants.

We believe that Cash Flow Matching (CFM) is one of the few strategies that can help us keep those promises with real certainty.

Why Now?

Because the world feels more uncertain than ever.

And if we’re honest, most of us don’t like uncertainty. Yet somehow, in the pension world, many plan sponsors have gotten used to it. Why is that?

Over the years, we’ve been taught that managing a DB plan is all about chasing returns. But that’s not really the case. When a plan invests 100% of its assets purely with a return objective, it locks itself into volatility — not stability or success.

That approach also puts your plan on the “asset allocation rollercoaster,” where markets rise and fall, and contributions swing higher and higher along with them. It’s time to step off that ride — at least for part of your portfolio.

So if it’s not all about returns, what is the real objective?

Managing a DB pension plan is all about cash flows — aligning the cash coming in (from principal and interest on bonds) with the cash going out (for benefits and expenses).

The real goal is to secure those promised benefits at a reasonable cost and with prudent risk. That’s the foundation of a healthy plan.

Does bringing more certainty mean I have to change how I manage the plan?

Yes — but only a little. The adjustments are modest and easy to implement.

How can I adopt a CFM strategy without making major changes?

The first step is to reconfigure your asset allocation. Most DB plans are currently 100% focused on returns. It’s time to split your assets into two clear buckets:

  1. Liquidity bucket – designed to provide cash flow to pay benefits and expenses.
  2. Growth bucket – focused on long-term return potential.

What goes into the liquidity bucket?

Most plans already hold some cash and core fixed income. Those assets can move into the liquidity bucket to fund benefit payments and expenses.

And what happens with the remaining assets?

Nothing changes there. Those assets stay in your growth or alpha bucket. The difference is that you’ll no longer need to sell from that bucket during market downturns, which helps protect your fund from the negative impact of forced selling.

Is that all I need to do to create more certainty?

Not quite. You’ll also want to reconfigure your fixed income exposure.

Instead of holding a generic, interest-rate-sensitive bond portfolio (like one tied to the Bloomberg Aggregate Index), you’ll want a portfolio that matches your plan’s specific liabilities — using both principal and income to accomplish the objective.

That’s where true cash flow matching comes in.

How does the matching process work?

We start by creating a Custom Liability Index (CLI) — a model of your plan’s projected benefit payments, expenses, and contributions. This serves as the roadmap for funding your monthly liquidity needs.

What information do you need to build that index?

Your plan’s actuary provides the projected benefits, expenses, and contributions as far out into the future as possible. The more data we have, the stronger the analysis. From there, we can map out your net monthly liquidity needs after accounting for contributions.

Which bonds do you use to match the cash flows?

We invest primarily in U.S. Treasuries and U.S. investment-grade corporate bonds. We stick with these because they provide dependable cash flows without introducing currency risk.

We limit our selections to bonds rated BBB+ or higher, and the longest maturity we’ll buy matches the length of the mandate. For example, if you ask us to secure 10 years of liabilities, the longest bond we’ll buy will mature in 10 years.

Do you build a laddered bond portfolio?

No — a traditional ladder would be inefficient for this purpose.

Here’s why: the longer the maturity and the higher the yield, the lower the overall cost of funding those future liabilities. So instead of a simple ladder, we use a proprietary optimization process to build the portfolio in a way that maximizes efficiency and minimizes cost.

It sounds manageable — not a big overhaul. Am I missing something?

Not at all. That’s exactly right.

Dividing assets into liquidity and growth buckets and reshaping your bond portfolio into a CFM strategy is typically all that’s required to bring more certainty to part of your plan.

Every plan is unique, of course, so each implementation will reflect its own characteristics. But generally speaking, CFM can reduce the cost of future benefits by about 2% per year — or roughly 20% over a 10-year horizon.

On top of that, it helps stabilize your funded status and contribution requirements.

How much should I allocate to CFM?

A good starting point is your existing cash and bond allocation. That’s the least disruptive way to begin.

Alternatively, you can target a specific time horizon — for example, securing 5, 7, or 10 years of benefits. We’ll run an analysis to show what asset levels are needed to meet those payments, which may be slightly more or less than your current fixed income and cash allocations.

Once implemented, do I just let the liquidity bucket run down?

Most clients choose to rebalance annually to maintain the original maturity profile. That keeps the strategy consistent over time. Of course, the rebalancing schedule can be customized to your plan’s needs and the broader market environment.

This all sounds great — but what does it cost?

In line with our mission to provide stability at a reasonable cost and with prudent risk, our fee is about half the cost of a typical core fixed income mandate.

If you’d like, we can discuss your specific plan details and provide a customized proposal.

Final thoughts

Thank you for taking the time to explore CFM. Many plan sponsors haven’t yet heard much about it, but it’s quickly becoming a preferred approach for those who value stability and peace of mind.

At the end of the day, having a “sleep well at night” strategy benefits everyone — especially your participants.

10.28.25
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Uncertainty versus Change

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

Seems like we have a conflict within the management of defined benefit plans. On one hand, human beings (plan sponsors) despise uncertainty. But nearly all public DB pension plans are embracing uncertainty in how they are managed. How? Through a traditional asset allocation framework that focuses the fund’s assets on a performance objective – the return on asset assumption (roughly 7% for the average public plan). Each second that the capital markets are operating, uncertainty is abundant, as price movements are out of one’s control. So let’s change how plans are managed. Not so simple, as those same human beings hate change. Oh, boy.

I have the privilege of speaking at the NCPERS Fall conference tomorrow. The title of my presentation is “Bringing an Element of Certainty to Pension Management”. Folks should absolutely eat up this topic, but given the conflict cited above, it will be interesting to see if the trustees in the audience embrace the concept of achieving some certainty despite having to implement change to their current operating practices.

Given that both uncertainty and change are difficult for humans, what are we to do? Well, psychological research suggests that uncertainty is generally more challenging because it disrupts our ability to predict, control, and prepare for outcomes, and in the process it triggers more anxiety and stress than change itself. According to the research:

  • Uncertainty introduces ambiguity about outcomes, which activates heightened anxiety in the brain. When people lack information about what will happen (such as market movements), they tend to experience more stress and feelings of helplessness.
  • Change, while uncomfortable, becomes easier to adapt to when the outcome is known, even if it’s negative. Humans can plan, adjust, and find coping strategies if they know what to expect. As a result, predictable change is less stressful than unpredictable change.

Why is uncertainty more challenging? Again, according to the research:

  • The human brain is wired to seek patterns and predict the future; uncertainty undermines this process, making adaptation feel more difficult.
  • Studies show that people prefer even certain bad news to ambiguous situations, because they can prepare for and process what’s coming.
  • Chronic uncertainty can lead to anxiety disorders and impaired decision-making, while change tends to prompt growth and learning once people know what they’re facing.

Uncertainty is usually more psychologically challenging than change because it creates anxiety about the unknown, whereas change with a known outcome—though still difficult—allows people to adapt and regain control. Given this reality, it would seem that reducing uncertainty within the management of a DB pension plan would outweigh the changes necessary to accomplish that objective. BTW, the changes needed aren’t great. All one needs to do to bring some certainty to the process is to convert the current core fixed income allocation to a cash flow matching (CFM) strategy that will SECURE the promised benefits for as far into the future as that allocation will cover. In the process you improve the fund’s liquidity profile and extend the investing horizon for the residual assets. A win/win!

How nice would it be to communicate to your plan participants that no matter what happens in the markets (uncertainty) the promised benefits are protected for the next 5-, 7-, 10- or more years. Talk about a “sleep well at night” strategy! Now that’s certainty that even change can live with.

10.15.25
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MV versus FV

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

There seems to be abundant confusion within certain segments of the pension industry regarding the purpose and accounting (performance) of a Cash Flow Matching (CFM) portfolio on a monthly basis. Traditional monthly reports focus on the present value (PV) of assets in marking those assets to month-end prices. However, when utilizing a CFM strategy, one is hoping to defease (secure) promised benefits which are a future value (FV). As a reminder, FVs are not interest rate sensitive. The movement in monthly prices become irrelevant.

If pension plan A owes a participant $1,000 next month or 10-years from now, that promise is $1,000 whether interest rates are at 2% or 8%. However, when converting that FV benefit into a PV using today’s interest rates, one can “lock in” the relationship between assets and liabilities (benefit payment) no matter which way rates go. To accomplish this objective, a CFM portfolio will match those projected liabilities through an optimization process that matches principal, interest, and any reinvested income from bonds to those monthly promises. The allocation to the CFM strategy will determine the length of the mandate (coverage period).

Given the fact that the FV relationship is secured, providing plan sponsors with the only element of certainty within a pension fund, does it really make any sense to mark those bonds used to defease liabilities to market each month? Absolutely, NOT! The only concern one should have in using a CFM strategy is a bond default, which is extremely rare within the investment grade universe (from AAA to BBB-) of bonds. In fact, according to a recent study by S&P, the rate of defaults within the IG universe is only 0.18% annually for the last 40-years or roughly 2/1,000 bonds.

A CFM portfolio must reflect the actuaries latest forecast for projected benefits (and expenses), which means that perhaps once per year a small adjustment must be made to the portfolio. However, most pension plans receive annual contributions which can and should be used to make those modest adjustments minimizing turnover. As a result, most CFM strategies will purchase bonds at the inception of a mandate and hold those same issues until they mature at par. This low turnover locks in the cost reduction or difference in the PV vs. FV of the liabilities from day 1 of the mandate. There is no other strategy that can provide this level of certainty.

To get away from needing or wanting to mark all the plan’s assets to market each month, segregate the CFM assets from the balance of the plan’s assets. This segregation of assets mirrors our recommendation that a pension plan should bifurcate a plan’s asset allocation into two buckets: liquidity and growth. In this case, the CFM portfolio is the liquidity bucket and the remaining assets are the growth or alpha assets. If done correctly, the CFM portfolio will make all the necessary monthly distributions (benefits and expenses), while the alpha assets can just grow unencumbered. It is a very clean separation of the assets by function.

Yes, bond prices move every minute of every day that markets are open. If your bond allocation is being compared to a generic bond index such as the Aggregate index, then calculating a MV monthly return makes sense given that the market value of those assets changes continuously. But if a CFM strategy can secure the cost reduction to fund FVs on day 1, should a changing MV really bother you? Again, NO. You should be quite pleased that a segment of your portfolio has been secured. As the pension plan’s funded status improves, a further allocation should be made to the CFM mandate securing more of the promised benefits. This is a dynamic and responsive asset allocation approach driven by the funded status and not some arbitrary return on asset (ROA) target.

I encourage you to reach out to me, if you’d appreciate the opportunity to discuss this concept in more detail.

10.08.25
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An Alternative Pension Funding Formula

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

I’ve spent the last few days attending and speaking at the FPPTA conference in Sawgrass, Florida. As I’ve reported on multiple occasions, I believe that the FPPTA does as good a job as any public fund organization of providing critical education to public fund trustees. A recent change to the educational content for the FPPTA centers on the introduction of the “pension formula” as one of their four educational pillars. In the pension formula of C+I = B+E, C is contributions, I is investment income (plus principal appreciation or depreciation), B is benefits, and E represents expenses.

To fund B+E, the pension fund needs to contribute an annual sum of money (C) not covered by investment returns (I) to fully fund liability cash flows (B+E). That seems fairly straightforward. If C+I = B+E, we have a pension system in harmony. But is a pension fund truly ever in harmony? With market prices changing every second of every trading day, it is not surprising that the forecasted C may not be enough to cover any shortfall in I, since the C is determined at the start of the year. As a result, pension plans are often dealing with both the annual normal cost (accruing benefits each year) and any shortfall that must be made up through an additional contribution amortized over a period of years.

As a reminder, the I carries a lot of volatility (uncertainty) and unfortunately, that volatility can lead to positive and negative outcomes. As a reminder, if a pension fund is seeking a 7% annual return, many pension funds are managing the plan assets with 12%-15% volatility annually. If we use 12% as the volatility, 1 standard deviation or roughly 68% of the annual observations will fall between 7% plus or minus 12% or 19% to -5%. If one wants to frame the potential range of results at 2 standard deviations or 19 out of every 20-years (95% of the observations), the expected range of results becomes 31% to -17%. Wow, one could drive a couple of Freightliner trucks through that gap.

Are you still comfortable with your current asset allocation? Remember, when the I fails to achieve the 7% ARC the C must make up the shortfall. This is what transpired in spades during the ’00s decade when we suffered through two major market corrections. Yes, markets have recovered, but the significant increase in contributions needed to make up for the investment shortfalls haven’t been rebated!

I mentioned the word uncertainty above. As I’ve discussed on several occasions within this blog, human beings loathe uncertainty, as it has both a physiological and mental impact on us. Yet, the U.S. public fund pension community continues to embrace uncertainty through the asset allocation decisions. As you think about your plan’s asset allocation, is there any element of certainty? I had the chance to touch on this subject at the recent FPPTA by asking those in the room if they could identify any certainty within their plans. Not a single attendee raised their hand. Not surprising!

As I result, I’d like to posit a slight change to the pension formula. I’d like to amend the formula to read C+I+IC = B+E. Doesn’t seem that dramatic – right? So what is IC? IC=(A=L), where A are the plan’s assets, while L= plan liabilities. As you all know, the only reason that a pension plan exists is to fund a promise (benefits) made to the plan participant. Yet, the management of pension funds has morphed from securing the benefits to driving investment performance aka return, return, and return. As a result, we’ve introduced significant funding volatility. My subtle adjustment to the pension formula is an attempt to bring in some certainty.

By carefully matching assets to liabilities (A=L) we’ve created an element of certainty (IC) not currently found in pension asset allocation. By adding some IC to the C+I = B+E, we now have brought in some certainty and reduced the uncertainty and impact of I. The allocation to IC should be driven by the pension plan’s funded status. The better the funding, the greater the exposure to IC. Wouldn’t it be wonderful to create a sleep-well-at-night structure in which I plays an insignificant role and C is more easily controlled?

To begin the quest to reduce uncertainty, bifurcate your plan’s assets into two buckets, as opposed to having the assets focused on the ROA objective. The two buckets will now be liquidity and growth. The liquidity bucket is the IC where assets and liabilities are carefully matched (creating certainty) and providing all of the necessary liquidity to meet the ongoing B+E. The growth portfolio (I) are the remaining plan assets not needed to fund your monthly outflows.

The benefits of this change are numerous. The adoption of IC as part of the pension formula creates certainty, enhances liquidity, buys-time for the growth assets to achieve their expected outcomes, and reduces the uncertainty around having 100% of the assets impacted by events outside of one’s control. It is time to get off the asset allocation and performance rollercoaster. Yes, recent performance has been terrific, but as we’ve seen many times before, there is no guarantee that continues. Adopt this framework before markets take no prisoners and your funded status is once again challenged.