Tag Archives: asset consultants

09.12.25
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Actuaries of DB Pension Plans Prefer Higher Interest Rates

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

I produced a post yesterday, titled “U.S. Rates Likely to Fall – Here’s the Good and Bad”. In that blog post I wrote, “I’d recommend that you not celebrate a potential decline in rates if you are a plan sponsor or asset consultant, unless you are personally looking for a loan.” Falling rates have historically benefited plan assets, and not just bonds, but risk assets, too. But lower rates cause the present value (PV) of liabilities to grow. A 50 bp decline in rates would cause the PV of liabilities to grow by 6% assuming a duration of 12-years. NOT GOOD!

Not being a trained actuary, although I spend a great deal of time communicating with them and working with actuarial output, I was hesitant to make that broad assessment. But subsequent research has provided me with the insights to now make that claim. Yes, unlike plan sponsors and asset consultants that are likely counting down the minutes to a rate cut next week, actuaries do indeed prefer higher interest rates.

Actuaries of DB pension plans, all else being equal, generally prefer higher interest rates when it comes to funding calculations and the plan’s financial position.

Impact of Higher Interest Rates

  • Lower Liabilities: When interest rates (used as the discount rate for future benefit payments) increase, the (PV) of the plan’s obligations may sharply decrease depending on the magnitude of the rate change, making the plan look better funded.
  • Lower Required Contributions: Higher discount rates mean lower calculated required annual contributions for plan sponsors and often lead to lower ongoing pension costs, such as PBGC costs per participant.
  • Potential for Surplus: Sustained periods of higher rates can create or increase pension plan surpluses, improving the financial health of the DB plan and providing flexibility for sponsors.

Why This Preference Exists

  • Discount Rate Role: Actuaries discount future benefit payments using an assumed interest rate tied to high-grade bond yields. The higher this rate, the less money is needed on hand today to meet future obligations.
  • Plan Health: Lower required contributions and lower projected liabilities mean sponsors are less likely to face funding shortfalls or regulatory intervention. Plans become much more sustainable and plan participants can sleep better knowing that the plan is financially healthy.
  • Plan Sponsor Perspective: While actuaries may remain neutral in advising on appropriate economic assumptions (appropriate ROA), almost all calculations and required reports look stronger with higher interest rates. What plan sponsor wouldn’t welcome that reality.

Consequences of Lower Interest Rates

  • Increase in Liabilities: Contrary to the impact of higher rates, lower rates drive up the PV of projected payments, potentially causing underfunded positions and/or the need for larger contributions.
  • Challenge for Plan Continuation: Persistently low interest rates have made DB plans less attractive or sustainable and contributed to a trend of plan terminations, freezes, or conversions to defined contribution or hybrid structures. The sustained U.S. interest rate decline, which spanned nearly four decades (1982-2021), crushed pension funding and led to the dramatic reduction in the use of traditional pension plans.

In summary, actuaries valuing DB pension plans almost always prefer higher interest rates because they result in lower reported liabilities, lower costs, and less financial pressure on employers. Given that 100% of the plan’s liabilities are impacted by movements in rates, everyone associated with DB pensions should be hoping that current interest rate levels are maintained, providing plan sponsors with the opportunity to secure the funded ratio/status through de-risking strategies. A DB pension plan is the gold standard of retirement vehicles and maintaining them is critical in combating the current retirement crisis.

07.18.25
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AI Needs An Education Regarding ALM/CFM!

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

I asked an AI tool that I use the following: Asset/Liability Management (ALM) is an effective tool for pensions. What strategies are currently being deployed?

As usual, the response was nearly instantaneous, but was it correct? Here is what I got:

Overview

“Asset/liability management (ALM) remains central to pension fund sustainability, aiming to balance expected pension liabilities with optimal asset growth. In 2025, pension funds deploy a range of strategies to ensure their ability to meet long-term obligations while managing risk efficiently.” No argument there. However, here is a list of the strategies. This is where I have an issue.

Key ALM Strategies Currently in Use

1. Liability-Driven Investing (LDI)

  • Matching Asset Duration to Liabilities: Many corporate pension plans invest in high-quality bonds with durations closely matching those of plan liabilities to mitigate interest rate risk. This ensures that both assets and liabilities react similarly to interest rate changes, stabilizing the funded status from year to year.
  • Glidepath Strategies: Plans gradually shift the asset mix towards more fixed-income securities as funded status improves or as the plan matures, further reducing risk and aligning assets with near-term liabilities.

2. Dynamic Asset Allocation

  • Strategic Shifts in Asset Mix: Pension funds adjust allocations based on changing liabilities, market conditions, and funding status. For instance, U.S. public pension plans have recently shifted asset allocations to maintain return expectations and recover from volatility.
  • Scenario-Based Modeling: Funds use forward-looking models to stress-test outcomes under varying economic scenarios, reviewing assumptions about returns, inflation, and participant demographics.

3. Risk Transfer Solutions

  • Pension Risk Transfer (PRT): Many sponsors employ annuity purchases and lump-sum windows to reduce long-term liability, transferring obligations to insurers. In 2024, settlement payouts (such as annuity buyouts) remained a significant tool for risk management among major pension plans.

4. Liability Modeling Innovations

  • Member-Level Simulation: Advanced models project individual participant cash flows, account for currency exposure, and enable granular liability projections. Such approaches allow more precise matching of assets to future obligations, improving ALM decision-making.
  • Regular Reviews and Assumption Updates: ALM programs, such as those at CalPERS, involve systematic reviews of demographic and financial assumptions (e.g., life expectancy, inflation), with revisions made every four years to incorporate emerging trends.

5. Use of Custom Benchmarks

  • Liability-Mimicking Portfolios: Funds create tailored portfolios (“benchmark” portfolios) that track the liability profile as closely as possible, often blending nominal bonds, inflation-linked bonds, and equities according to the plan’s specifics (such as maturity and inflation sensitivity).

That’s it? Where is Cash Flow Matching (CFM)? In each of these scenarios, liquidity needed to fund benefits and expenses is missing. Duration strategies minimize interest rate risk, but don’t produce timely liquidity to fully fund B+E. Furthermore, duration strategies that use an “average” duration or a few key rates don’t duration match as well as CFM that duration matches EVERY month of the assignment.

In the second set of products – dynamic asset allocation – what is being secured? Forecasts related to future economic scenarios come with a lot of volatility. If anyone had a crystal ball to accomplish this objective with precision, they’d be minting $ billions!

A PRT or risk transfer solution is fine if you don’t want to sustain the plan for future workers, but it can be very expensive to implement depending on the insurance premium, current market conditions (interest rates), and the plan’s funded status

In the liability modeling category, I guess the first example might be a tip of the hat to cash flow matching, but there is no description of how one actually matches assets to those “granular” liability projections. As for part two, updating projections every four years seems like a LONG TIME. In a Ryan ALM CFM portfolio, we use a dynamic process that reconfigures the portfolio every time the actuary updates their liability projections, which are usually annually.

Lastly, the use of Custom benchmarks as described once again uses instruments that have significant volatility associated with them, especially the reference to equities. What is the price of Amazon going to be in 10-years? Given the fact that no one knows, how do you secure cash flow needs? You can’t! Moreover, inflation-linked bonds are not appropriate since the actuary includes an inflation assumption in their projections which is usually different than the CPI.  

Cash Flow Matching is the only ALM strategy that absolutely SECURES the promised benefits and expenses chronologically from the first month as far out as the allocation will go. It accomplishes this objective through maturing principal and interest income. No forced selling to meet those promises. Furthermore, CFM buys time for the residual assets to grow unencumbered. This is particularly important at this time given the plethora of assets that have been migrated to alternative and definitely less liquid instruments.

As mentioned earlier, CFM is a dynamic process that adapts to changes in the pension plan’s funded status. As the Funded ratio improves, allocate more assets from the growth bucket to the CFM portfolio. In the process, the funded status becomes less volatility and contribution expenses are more manageable.

I’m not sure why CFM isn’t the #1 strategy highlighted by this AI tool given its long and successful history in SECURING the benefits and expenses (B&E). Once known as dedication, CFM is the ONLY strategy that truly matches and fully funds asset cash flows (bonds) with liability cash flows (B&E). Again, it is the ONLY strategy that provides the necessary liquidity without having to sell assets to meet ongoing obligations. It doesn’t use instruments that are highly volatile to accomplish the objective. Given that investment-grade defaults are an extremely rare occurrence (2/1,000 bonds), CFM is the closest thing to a sure bet that you can find in our industry with proven performance since the 1970s.

So, if you are using an AI tool to provide you with some perspective on ALM strategies, know that CFM may not be highlighted, but it is by far the most important risk reducing tool in your ALM toolbox.

05.09.24
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Kinda Silly Question

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

If you ask the average person the following questions, I suspect that most people would answer in the affirmative.

Are you handsome?

Are you intelligent?

Are you honest?

So, I found it somewhat humorous when I saw the headline from a recent conference that said, “Private Credit managers say their is more room for growth”. Are you surprised? How many investment management organizations turn down new business when it presents itself? Does it really matter that private debt has seen something like 10X asset growth in the last couple of decades? Perhaps these managers have such a unique niche that they honestly believe that their product can manage through any challenge, especially one as “trivial” as natural capacity. How many times have you heard the following: “Our maximum capacity that we previously cited was just a target amount. Now that we actually have assets under management, it is clearer that we have much more capacity than initially anticipated.” Seems convenient, doesn’t it?

I can recall a few difficult conversations with both sales and senior management when I was leading an investment team at a previous shop. Our research and portfolio management teams did an outstanding job of determining the appropriate capacity for each strategy, and we had 50+ optimizations that each represented a strategy/product. We were particularly cognizant of the capacity associated with our market neutral product, which was roughly $3 billion in AUM. We had to be most careful with shorting stocks given the borrowing rates being charged by our prime brokers. The size of trades were always a concern. Yet, it really didn’t matter to outside parties that just wanted to see assets flow into our products. It didn’t matter whether or not we would be able to generate the return/risk characteristics as previously defined by our investment team.

These awkward conversations occur all too frequently, especially for investment companies that are public and have quarterly earnings expectations that must be met. I’ve never understood how the investment management industry can claim to be “long-term” investors yet be driven by quarter-to-quarter earnings announcements that impact the investment teams when layoffs are announced. Has our industry just morphed into a number of large sales organizations? Do we have “investment” firms focused on generating appropriate return and risk characteristics? Do these firms truly understand the capacity based on trading metrics?

I don’t work for a company that participates in the Private Credit arena. I couldn’t tell you whether or not there remains adequate capacity to enable managers in that space to generate decent return and risk characteristics. But asking managers in that space whether or not they can take on more assets and generate more fees is kinda silly. I hope that the asset consulting community has the tools to evaluate capacity for not only this asset class, but any other being considered for use in a DB pension. Given that most “active” managers have failed over time to generate a return in excess of their respective benchmark, I would hazard a guess that the natural capacity for their strategy has been eclipsed. These excess assets lead to ever increasing trading costs of market impact and time delays (not commissions). Couple those costs with the fees that active managers charge and you create a hurdle that is difficult to overcome.

07.30.15
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Future Contributions Into A DB Plan Should Be Considered An Asset Of The Fund

Recently, Mary Williams Walsh, NY Times, penned an article titled,

“Standards Board Struggles With Pension Quagmire”.

The gist of the article had to do with what role did the actuaries and actuarial accounting play in the current state of public pension funding. Many of the actuaries felt that they were pressed by politicians into reverse-engineering their calculations to achieve a predetermined result (contribution cost). “That can’t be good public policy,” said Bradley D. Belt, a former pension regulator, who is now the vice chairman of Orchard Global Capital Group.

According to Ms. Walsh, “he called for additional disclosures by states and cities, including the current value of all pensions promised, calculated with a so-called risk-free discount rate, which means translating the future benefits into today’s dollars with the rate paid on very safe investments, like Treasury bonds.”

Actuaries currently use higher discount rates, which complies with their professional standards but flies in the face of modern asset-pricing theory. Changing their practice to resolve this is one of the most hotly contested proposals in the world of public finance, because it would show the current market value of public pensions and probably make it clear that some places have promised more than they can deliver.

But, if we are going to require DB plans to mark-to-market their fund’s liabilities, inflating future promised benefits, we should also include future contributions as an asset of the plan. Since many, if not most plans, have a legal obligation to fund the plan at an actuarial determined level or through negotiations, these contributions are likely to be made (NJ is one of the exceptions).

When valuing liabilities at “market” without taking into consideration future contributions, plans are artificially lowering their funded ratio, while negatively exacerbating their funded status. Most individuals (tax payers) would not understand the “accounting”, but they would certainly comprehend the negative publicity of a < 50% funded plan.

Most public pension plans derive a healthy percent of their assets through contributions.  Not reflecting these future assets in the funded ratio creates the impression that these funds are not sustainable, which for most public plans is not close to reality.

We need DB plans to be the backbone of the US retirement industry. Only marking to market liabilities without giving a nod to future contributions doesn’t fairly depict the whole story. We can do better.

07.24.14
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Of Course They Are Going To Pick Above Average Managers!!

I had the pleasure of attending the Opal Conference in Newport, RI the last few days. Opal’s “Public Funds Summit East: Navigating the Future” was well attended by public fund trustees, asset consultants and investment management professionals. I will provide a general overview in a later blog post, but I want to dedicate this text to an issue related to investment management fees.

I was particularly disturbed by a comment by an asset consultant when the issue of performance fees was raised. This consultant was troubled by the notion of paying performance fees to managers of any ilk because managers are chosen by his firm who can and will add value, so why pay more for their services? How naive!

Just prior to this panel’s discussion, we were implored by a plan sponsor to seek economies of scale, while also being cognizant of fees (all fees, and not just investment manager fees), as they can be destructive to a plan’s long-term health. I absolutely agree.

Even if a consultant thought that a manager had the above average ability to provide an excess return on a fairly consistent basis, why would they or their clients be willing to pay a manager their full fee without the promise of delivery? As a reminder, the “average” manager will return the performance of the market minus transaction costs and fees.

It is fairly easy to calibrate the performance fee with the asset-based fee based on the expected excess return objective. If the manager achieves the return target, the fees paid should be roughly equivalent, with perhaps the performance fee relationship paying slightly more as compensation for the manager assuming more risk. However, in no case should the performance fee reward a manager to a much greater extent than the asset based fee would have generated.

If the manager truly has the ability to add consistent value, they should be comfortable assuming a performance fee. Importantly, the plan sponsor shouldn’t fear the injection of more risk into the strategy, as the manager is not likely interested in jeopardizing their reputation for a few more basis points. In addition, there are easy ways to track whether this is happening.

Lastly, paying flat asset-based fees in lieu of creating a more incentive based compensation structure is just wrong. Plans should be happy to pay fees based on value-add, but should be infuriated when forced to pay an asset-based fee for the usual less than index return.

KCS has a white paper on this topic that can be accessed on the KCS website. Don’t hesitate to reach out to us if you’d like to discuss this issue in greater detail. Asset consultants are kidding themselves (and their plan sponsor clients) if they think that they will only pick above average managers!

01.15.14
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Asset Consulting Firms and Their Consultants Aren’t Commodities

The environment for asset consulting firms is quite challenging.  Historically, there have been few barriers to entry, and measuring the value-add provided by the asset consulting firm has been difficult to gauge.  As such, hiring decisions have often come down to price, with the low bidder more often than not winning the assignment.  For those firms fortunate to be given an assignment, the life cycle of the relationship is generally fairly long (about 7 years), as it usually takes a departure of the consultant or a major screw up before the relationship is terminated.  This practice has to change.

Given the current state of defined benefit plans in the US and abroad, this is not the time to fiddle while Rome burns. It is imperative that asset consultants be judged for the value that they bring to a relationship, and they should be compensated based on that value-add.  There are many services that consultants provide, but the importance to the success or failure of a plan varies widely.  Establishing the right plan benchmark is critical, and it isn’t the ROA. We believe that it should be the plan’s specific liabilities. The investment structure and asset allocation that flows from a greater knowledge of the liabilities are key decisions that drive most of the plan’s subsequent return. However, it seems to us that most of the time (80/20 rule) is spent on trying to identify value-added managers. Get the wrong asset allocation and the best performing managers in the weakest asset class won’t help you much.

Let’s see if the industry can refocus on the importance of DB plans, so that we can stabilize the retirements for both our private and public workers.  As such, let’s begin to evaluate consulting firms that can improve the funded ratio and funded status, while minimizing contribution costs. These are the important metrics when evaluating a consulting firm and their consultants.  Experience matters in this industry.  We pay great homage to it on the asset management side of the business.  Why isn’t this as critical when evaluating asset consultants?  Remember: asset consultants have a greater impact on your plan than any individual manager does!