Tag Archives: bonds

03.06.26
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DB Pension Plan “Absolute Truths” Revisited

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

This post may be familiar to some of you, as I originally published it in October 2024. Given today’s great uncertainty related to geopolitics, markets, and the economy, I thought it relevant to share once again. Please don’t hesitate to reach out to me if you want to challenge any part of this list. We always welcome your feedback.

The four senior 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 strategies 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 to protect and preserve these critically important retirement vehicles before they are subject to a similar fate.

We’ve compiled a list of DB pension “Absolute 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) pension plans are the best retirement vehicle!
  • 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 interest rates do. As a result, they are not interest rate sensitive.
  • Pension inflation is not equal to the CPI but a rate unique to each plan sponsor.
  • Best way to hedge pension inflation is through Cash Flow Matching (CFM) since inflation is in the actuarial projections
  • 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 cash flows (interest and principal at maturity).
  • 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 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 CFM investment process.
  • The liquidity assets should be used to fund B&E chronologically buying time for the alpha assets to grow unencumbered in their quest to meet those faraway future liabilities not yet defeased by the liquidity assets.
  • The Growth assets will consist of all non-bonds, which can now grow unencumbered, as they are no longer a source of liquidity. Growth assets will fund those remaining future liabilities not yet defeased by the liquidity assets.
  • The Return on asset (ROA) assumption should be a calculated # derived through an Asset Exhaustion Test (AET)
  • The pension plan’s asset allocation should be responsive to the plan’s funded status and not the ROA.
  • 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 “benefit” through a Defined Contribution plan is poor policy.
  • Unfortunately, doing the same thing over and over and over 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!

03.02.26
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Eliminate the Uncertainty

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

There are many benefits to using Cash Flow Matching (CFM) for your pension plan, endowment or foundation. The obvious benefit is the liquidity that is created to meet ongoing expenditures, whether benefit payments or grants. That liquidity comes at a premium today for many entities that have migrated significant financial resources to alternative investments, which are having a difficult time providing their investors with capital distributions.

The other significant benefit is the certainty that comes from using CFM. I’ve appreciated the opportunity to speak at NCPERS, IFEBP, LATEC, and OPAL in the last few months and in each case, I asked the audience if there was any investment strategy within their fund that brought certainty? Not a single hand was raised. They could have mentioned cash reserves as an example, but that is an expensive long-term strategy because of the low short-term yields available today.

The cloud of uncertainty under which we live is not comfortable! Yes, both pension funds and E&Fs are long-term investors, but the riding of markets up and down often leads to a significant increase in the contributions necessary to maintain their funding. That activity is not helpful to anyone. Who knows what will transpire as our country navigates through several potential geopolitical landmines. Combine that reality with uncertain economic growth, weaker labor markets, sticky inflation, and equity valuations that seem stretched, and markets could be in for a rocky period.

Wouldn’t it be a blessing to have CFM in place that not only provides the necessary liquidity so that assets aren’t forced to be sold at less than opportune times, but a strategy (service) that provides certainty since your obligations (liability cash flows) are matched with asset cash flows of bond principal and interest income for as far out as the bond and cash allocation will provide. It isn’t often that we are presented with an investment strategy that is truly a sleep-well-at-night offering for the long term. 

As a reminder, humans hate uncertainty, as it impacts us in both psychological and physiological ways. Yet, in the management of pensions and E&Fs, sponsors have wholeheartedly embraced uncertainty. The disconnect is quite surprising. Again, I don’t know what will transpire in markets today, tomorrow, or next year. I don’t know how the Iran situation will impact shipping lanes and the price of oil and inflation or worse, destabilize the entire region by bringing into the conflict Iran’s friends, such as Russia and China. I’m not a gambler and I don’t believe that managers of pension assets should be either.

I think it is critically important to SECURE the promises given to your plan’s participants and to achieve that objective with low cost and prudent risk. Riding the asset allocation rollercoaster accomplishes neither objective. Now’s the time to act. Not after markets have been rocked.

01.30.26
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“Everybody’s looking under every rock.” Jay Kloepfer

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

Institutional Investor’s James Comtois has recently published an article that quoted several industry members on the near-term (10-years) return forecast for both public and private markets, which according to those asked are looking anemic. No one should be surprised by these forecasts given the incredible strength of public markets during the past three years and the fact that regression to the mean tendencies is not just theory.

An equally, if not greater, challenge is liquidity. As the title above highlights, Jay Kloepfer, Director of Capital Markets Research at Callan, told II that “Liquidity has become a bigger issue,” He went on to say that “Everybody’s looking under every rock.” Not surprising! Given the migration of assets from public markets to private during the last few decades. The rapid decline in U.S. interest rates certainly contributed to this asset movement, but expectations for “outsized” gains from alternatives also fueled enthusiasm and action. The Callan chart below highlights just how far pension plans have migrated.

I’ve written a lot on the subject of liquidity. Of course, the only reason that pension plans exist is to fund a promise that was made to the participants of that fund. Those promises are paid in monthly installments. Not having the necessary liquidity can create significant unintended consequences. No one wants to be a forced seller in a liquidity challenged market. It is critical that pension plans have a liquidity policy in place to deal with this critical issue. Equally important is to have an asset allocation that captures liquidity without having to sell investments.

Cash flow matching (CFM) is such a strategy. It ensures that the necessary liquidity is available each and every month through the careful matching of asset cash flows (interest and principal) with the liability cash flows of benefits and expenses. No forced selling! Furthermore, the use of CFM extends the investing horizon for those growth assets not needed in the CFM program. Those investments can just grow unencumbered. The extended investing horizon also allows the growth assets to wade through choppy markets without the possibility of being sold at less than opportune times.

So, if you are concerned about near-term returns for a variety of assets and with creating the necessary liquidity to meet ongoing pension promises, don’t rely on the status quo approach to asset allocation. Adopt a bifurcated asset allocation that separates plan assets into liquidity and growth buckets. Your plan will be in much better shape to deal with the inevitable market correction.

01.23.26
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How Does One Secure A Benefit?

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

We hope that you’ll agree that going to Chicago in January demonstrates the lengths that Ryan ALM personnel will go to help plan sponsors and their advisors protect and preserve DB pension plans. We are just thankful that we left yesterday, as today’s temperature is not expected to get to 0. OUCH!

Ron Ryan and I spent the last couple of days speaking with a number of funds and consultants about the many benefits of cash flow matching (CFM), which is gaining incredible traction among pension sponsors of all types. Who doesn’t want an element of certainty and enhanced liquidity within their plans given all the uncertainty we are facing in markets and geopolitically.

The idea of creating an element of certainty within the management of pension plans sounds wonderful, but how is that actually achieved? This is a question that we often receive and this trip was no exception. We had been discussing the fact that the relationship between asset cash flows (bond principal and interest) and liability cash flows (benefits and expenses) is locked in on the day that the bond portfolio is produced. The optimization process that we created blends the principal and interest from multiple bonds to meet the monthly obligations of benefits and expenses with an emphasis on longer maturity and higher yielding bonds to capture greater cost reduction of those future promises.

However, to demonstrate how one defeases a future liability, my example below highlights the matching of one bond versus one future $2 million 10-year liability. In this example from 18-months ago we purchased:

Bond: MetLife 6.375% due 6/15/34, A- quality, price = $107.64

Buy $1,240,000 par value of MetLife at a cost = $1,334,736

Interest is equal to the par value of bonds ($1,240,000) times the bond’s coupon (6.375%)

As a result of this purchase, we Receive: 

  Interest =  $78,412.50 annually ($39,206.25 semi-annual payments)

                            Total interest earned for 10 years is $784,125

  Principal = $1,240,000 at maturity (par value)

Total Cash Flow = $2,024,125  – $2,000,000 10-year Liability  = $24,124.99 excess

                             ($24,124.99 excess Cash Flow)

Benefits:

Able to fund $2 million benefit at a cost of $1.335 million or a -33.25% cost reduction

Excess cash flow can be reinvested or used to partially fund other benefits

In today’s yield environment, our clients benefit to a greater extent asking us to create longer maturity programs given the steepness of the yield curve. If they don’t have the assets to fund 100% of those longer-term liabilities, we can defease a portion of them through what we call a vertical slice. That slice of liabilities can be any percentage that allows us to cover a period from next month to 30-years from now. In a recent analysis produced for a prospect, we constructed a portfolio of bonds that covered 40% of the pension plan’s liabilities out to 30-years. As a result, we reduced the present value cost to defease those liabilities by –42.7%!!

Reach out to us today to learn how much we can reduce the future value cost of your promised benefits. We do this analysis for free. We encourage you to take us up on our generous offer.

12.17.25
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FV Benefits Reduced by -56.1% – Really!

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

I truly relish getting feedback related to my blog posts. I wasn’t surprised that there was more activity, and a little skepticism, related to my recent post that discussed the output from a current project. You may recall the post titled, “Bond Math and A Steepening Yield Curve – Perfect Together”, in which I shared that one particular Cash Flow Matching (CFM) implementation resulted in a potential -56.1% reduction in the FV cost of promised pension benefits. A few folks questioned the math, while another made the comment that the “savings” or cost reduction was nothing more than the time value of money. But isn’t that the reason to have pension assets in the first place so you are not funding liabilities at 100 cents on the dollar (pay-as-you-go).

Well, here’s the thing, the use of bonds, the only asset class with a known cash flow (future value at maturity and contractual semi-annual interest payments), brings to the management of pensions an element of certainty not found elsewhere. Yes, it is conceivable that one could cobble together a group of investment strategies that might subsequently achieve a targeted return that would help pay those obligations, but the volatility associated with this return-focused approach may also lead to significant underperformance and higher contribution expenses in the process.

With CFM, the savings (cost reduction) gets locked in on day one of the assignment. Give us a 5-year, 10-year, or longer assignment to secure those promised benefits, and we’ll be able to give you the likely return for that entire period. What other investment strategy can do that? Furthermore, CFM provides the necessary liquidity without forced selling or the sweep of dividends, interest, and capital distributions that should be reinvested in those higher returning strategies. In the process, the investing horizon for the plan’s assets is extended enhancing the probability that they will achieve the desired outcome.

In the example used in the previous Blog post, the -56.1% cost reduction was achieved with only 40% of the plan’s assets. By using a vertical slice approach, in which we secure a portion of the monthly obligations, we were able to extend the coverage period from 11-years to 30-years. That extension allowed us to use longer maturity bonds at substantially higher yields, which took advantage of bond math that proclaims that the longer the maturity and the higher the yield, the lower the cost. It’s true!

In today’s interest rate environment in which the average BBB corporate bond is trading at a yield close to 6%, a pension plan can capture roughly 89% of the target return (6.75% average ROA) with little to no volatility. How wonderful! Given that humans hate uncertainty, why don’t plan sponsors adopt the use of CFM to bring some certainty to their pension systems? Why do they choose to continue to ride the rollercoaster of returns provided by markets leading to increased contributions following down markets?

So, if you are still skeptical regarding our ability to provide significant cost reductions specific to your set of liabilities, allow us to provide you with a FREE analysis highlighting how CFM can support your pension plan and the plan’s participants. There may not be such a thing as a free lunch, but we can provide you with a sleep-well-at-night strategy.

12.11.25
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Something Has Got to Give

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

Not surprisingly, the U.S. Federal Reserve’s FOMC lowered rates another 25 bps today. The new target is 3.75%-4.0%, down from 4.5%-4.75% during the last 3 meetings. Currently, the 10-year Treasury yield (4.145% at 3:21 pm EST) is only marginally greater than the median CPI (Latest reading from the Cleveland Fed is 3.5% annually).

Ryan ALM, Inc.’s Head Trader, Steve DeVito put together the following comparison.

Steve is comparing the 10-year Treasury note yield (blue) versus the Median CPI (red) since January 2016. The green line is the “real” yield (10-year Treasury – the median CPI). For this period of time, there has been very little real yield, as U.S. rates were driven to historic lows before inflation spiked due to Covid-19 factors. However, historically (1962-2025), the real yield has average 2%. With rates down and inflation remaining stubbornly steady to increasing slightly, the real yield that investors are willing to take is, and has been, quite modest (0.17% since 2008). Why? Were the historically low rates in reaction to covid-19 an anomaly, or has something changed from an investor standpoint? Given today’s fundamentals, one might assume that investors are anticipating a sudden reversal in inflation, but is that a smart bet?

The WSJ produced the graph in today’s edition highlighting the change in the U.S. Treasury yield curve during the last year. As one can clearly see, the yield curve has gotten much steeper with the 30-year Treasury bond yield 0.4% above last year’s level (at 4.81%). That steepness would indicate to me that there is more risk longer term from inflation potentially rising.

So, it seems as if something has to give. If inflation remains at these levels, the yield on the 10-year Treasury note should be about 1.25% greater than today. If in fact, yields were to rise to that level, active core fixed income managers would see significant principal losses. However, cash flow matching managers and their clients would see the potential for greater cost reduction in the defeasing of pension liabilities, especially for longer-term programs. Bond math is very straight forward. The longer the maturity and the higher the yield, the greater the cost savings.

Managing a pension plan should be all about cash flows. That is asset cash flows versus liability cash flows of benefits and expenses. Higher yields reduce the future value of those promises. Remember, a CFM strategy is unique in that it brings an element of certainty (barring a default) to the management of pensions which live in a world of great uncertainty. Aren’t you ready for a sleep-well-at-night strategy?

10.17.25
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Remember: NO Free Lunch!

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

In 1938, journalist Walter Morrow, Scripps-Howard newspaper chain, wrote the phrase “there ain’t no such thing as a free lunch”. The pension community would be well-served by remembering what Mr. Morrow produced more than eight decades ago. Morrow’s story is a fable about a king who asks his economists to articulate their economic theory in the fewest words. The last of the king’s economists utters the famous phrase above. There have been subsequent uses of the phrase, including Milton Friedman in his 1975 essay collection, titled “There’s No Such Thing as a Free Lunch”, in which he used it to describe the principle of opportunity cost.

I mention this idea today in the context of private credit and its burgeoning forms. I wrote about capacity concerns in private credit and private equity last year. I continue to believe that as an industry we have a tendency to overwhelm good ideas by not understanding the natural capacity of an asset class in general and a manager’s particular capability more specifically. Every insight that a manager brings to a process has a natural capacity. Many managers, if not most, will eventually overwhelm their own ideas through asset growth. Those ideas can, and should be, measured to assess their continuing viability. It is not unusual that good insights get arbitraged away just through sheer assets being managed in the strategy.

Now, we are beginning to see some cracks in the facade of private credit. We have witnessed a significant bankruptcy in First Brands, a major U.S. auto parts manufacturer. Is this event related to having too much money in an asset class, which is now estimated at >$4 trillion.? I don’t know, but it does highlight the fact that there are more significant risks investing in private deals than through public, investment-grade bond offerings. Again, there is no free lunch. Chasing the higher yields provided by private credit and thinking that there is little risk is silly. By the way, as more money is placed into this asset class to be deployed, future returns are naturally depressed as the borrower now has many more options to help finance their business.

In addition, there is now a blurring of roles between private equity and private credit firms, which are increasingly converging into a more unified private capital ecosystem. This convergence is blurring the historic distinction between equity sponsors and debt providers, with private equity firms funding private credit vehicles. Furthermore, we see “pure” credit managers taking equity stakes in the borrowers. So much for diversification. This blurring of roles is raising concerns about valuations, interconnected exposures, and potential conflicts of interest due to a single manager holding both creditor and ownership stakes in the same issue.

As a reminder, public debt markets are providing plan sponsors with a unique opportunity to de-risk their pension fund’s asset allocation through a cash flow matching (CFM) strategy. The defeasement of pension liabilities through the careful matching of bond cash flows of principal and interest SECURES the promised benefits while extending the investing horizon for the non-bond assets. There is little risk in this process outside of a highly unlikely IG default (2/1,000 bonds per S&P). There is no convergence of strategies, no blurring of responsibilities, no concern about valuations, capacity, etc. CFM remains one of the only, if not the only, strategies that provides an element of certainty in pension management. It isn’t a free lunch (we charge 15 bps for our services to the first breakpoint), but it is as close as one will get!

09.23.25
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Buy on the Rumor…

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

After 44-years in the investment industry I’ve pretty much heard most of the sayings, including the phrase “buy on the rumor and sell on the news”. I suspect that most of you have probably heard those words uttered, too. However, it isn’t always easy to point out an example. Here is graph that might just do the trick.

There had been significant anticipation that the U.S Federal Reserve would cut the Fed Funds Rate and last week that expectation was finally realized with a 0.25% trimming. However, it appears that for some of the investment community that reduction wasn’t what they were expecting. As the graph above highlights, the green line representing Treasury yields as of this morning, have risen nicely in just the last 6 days for most maturities 3 months and out, with the exception of the 1-year note. In fact, the 10- and 30-year bonds have seen yields rise roughly 10 bps. Now, we’ve seen more significant moves on a daily basis in the last couple of years, but the timing is what has me thinking.

There are still many who believe that this cut is the first of several between now and the end of 2025. However, there is also some trepidation on the part of some in the bond world given the recent rise in inflation after a prolonged period of decline. As a reminder, the Fed does have a dual mandate focused on both employment and inflation, and although the U.S. labor force has shown signs of weakening, is that weakness creating concerns that dwarf the potential negative impact from rising prices? As stated above, there may also have been some that anticipated the Fed surprising the markets by slicing rates by 0.50% instead of the 0.25% announced.

In any case, the interest rate path is not straight and with curves one’s vision can become obstructed. What we might just see is a steepening of the Treasury yield curve with longer dated maturities maintaining current levels, if not rising, while the Fed does their thing with short-term rates. That steepening in the curve is beneficial for cash flow matching assignments that can span 10- or more years, as the longer the maturity and the higher the yield, the greater the cost reduction to defease future liabilities. Please don’t let this attractive yield environment come and go before securing some of the pension promises.

09.11.25
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U.S. Rates Likely to Fall – Here’s the Good and Bad

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

Unfortunately, there exists weakness in the U.S. labor force, as a notable deterioration in job creation, initial jobless claims, and job openings is taking place at this time. This weakness will likely lead the Federal Reserve to lower U.S. interest rates at the next FOMC, which takes place next week with an announcement on the 18th. The current consensus is for a 0.25% reduction in the Fed Fund’s Rate to 4.0%-4.25%. There is also a rising expectation that the “cut” could be larger. That might be more hope than reality at this time, given the CPI’s 0.4% posting today.

So, if rates were to be lowered, who benefits and who gets hurt? Well, individuals seeking loans – mortgages, cars, student loans – certainly benefit. But individuals hoping to generate some income from savings and retirement assets get hurt, especially since these rates tend to be shorter maturity instruments. Who else is impacted? Fixed income asset managers will benefit if they are holding coupon bonds, as falling rates drive bond prices upward. However, those holding bonds with adjustable yields won’t benefit as much.

How about DB pension funds? Yes, those pension funds invested in U.S. fixed income will likely see asset appreciation. However, both public and multiemployer plans have dramatically reduced their average exposure to this asset class. According to P&I’s annual survey, multiemployer plans have 18.2% in U.S. domestic fixed income, while public plans have roughly 18.7% of plan assets dedicated to U.S. fixed income. As a point of reference, corporate plans have nearly half of the plan’s assets dedicate to fixed income (45.4%). As rates fall, these plans will see some appreciation providing a boost in their quest to achieve the desired ROA. Great!

However, let us not forget that pension liabilities will be negatively impacted by falling rates, as they are bond-like in nature and the present value of those liabilities will grow. This is what crushed DB pensions during the massive decline in interest rates from 1982 until 2021. A move down in rates will directly benefit less than 50% of the assets, if we are talking about a corporate plan, and <20% of the assets for multiemployer and public funds. However, 100% of the liabilities will be impacted! Doesn’t seem like a good trade-off. As a result, funded ratios will decline and funded status shortfalls will grow, leading to greater contributions.

Given the mismatch identified above, 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. I would also recommend that you align your plan’s asset cash flows (principal and income from bonds) with your liability cash flows (benefits and expenses) while rates remain moderately high. As I’ve stated many times in this blog, Pension America had a great opportunity to de-risk DB pensions in 1999 but failed to act. Please don’t let this opportunity slip by without appropriate action.

07.31.25
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When Should I Use CFM?

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

Good morning. I’m currently in Chicago in the midst of several meetings. Yesterday’s meetings were outstanding. As you’d expect, the conversations were centered on DB pension plans and the opportunity to de-risk through a Cash Flow Matching strategy (CFM) in today’s economic environment. The line of questioning that I received from each of my meeting hosts was great. However, there does seem to be a misconception on when and how to use CFM as a de-risking tool. Most believe that you engage CFM for only the front-end of the yield curve, while others think that CFM is only useful when a plan is at or near full funding. Yes, both of those implementations are useful, but that represents a small sampling of when and how to implement CFM. For instance:

As a plan sponsor you need to make sure that you have the liquidity necessary to meet you monthly benefits (and expenses). Do you have a liquidity policy established that clearly defines the source(s) of liquidity or are you scurrying around each month sweeping dividends, interest, and if lucky, capital distributions from your alternative portfolio? Unfortunately, most plan sponsors do not have a formal liquidity policy as part of their Investment Policy Statement (IPS). CFM ensures that the necessary liquidity is available every month of the assignment. There is not forced selling!

Do you currently have a core fixed income allocation? According to a P&I asset allocation survey, public pension plans have an average 18.9% in public fixed income. How are you managing that interest rate risk, which remains the greatest risk for an actively managed fixed income portfolio? As an industry, we enjoyed the benefits of a nearly four decades decline in U.S. interest rates beginning in 1982. However, the prior 28-years witnessed rising rates. Who knows if the current rise in rates is a blip or the start of another extended upward trend? CFM defeases future benefit payments which are not interest rate sensitive. A $2,000 payment next month or 10-years from now is $2,000 whether rates rise or fall. As a result, CFM mitigates interest rate risk.

As you have sought potentially greater returns from a move into alternatives and private investments, not only has the available liquidity dried up, but you need a longer time horizon for those investments to mature and produce the expected outcome. Have you created a bridge within your plan’s asset allocation that will mitigate normal market gyrations? A 10-year CFM allocation will not only provide your plan with the necessary monthly liquidity, but it is essentially a bridge over volatile periods as it is the sole source of liquidity allowing the “alpha” assets to just grow and grow. That 10-year program coincides nicely with many of the lock-ins for alternative strategies.

There has been improvement in the funded status of public pension plans. According to Milliman, as of June 30, 2025, the average funded ratio for the constituents in their top 100 public pension index is now 82.9%, which is the highest level since December 2021. That’s terrific to see. Don’t you want to preserve that level of funding and the contribution expenses that coincide with that level? Riding the rollercoaster of performance can’t be comforting. Given what appears to be excessive valuations within equity markets and great uncertainty as it relates to the economic environment, are you willing to let your current exposures just ride? By allocating to a CFM program, you stabilize a portion of your plan’s funded status and the contributions associated with those Retired Lives Liability. Bringing a level of certainty to a very uncertain process should be a desirable goal for all plan sponsors and their advisors.

If I engage a CFM mandate, don’t I negatively impact my plan’s ability to meet the return objective (ROA) that we have established? NO! The Ryan ALM CFM portfolio will be heavily skewed to investment-grade corporate bonds (most portfolios are 100% corporates) that enjoy a significant premium yield relative to Treasuries and agencies. As mentioned previously, public pension plans already have an exposure to fixed income. That exposure is already included in the ROA calculation. By substituting a higher yielding CFM portfolio for a lower yielding core fixed income program benchmarked to the Aggregate index, you are enhancing the plan’s ability to achieve the ROA while also eliminating interest rate risk. A win-win in my book!

So, given these facts, how much should I allocate to a CFM mandate? The answer is predicated on many factors, including the plan’s current funded status, the ability to contribute, whether or not the plan is in a negative cash flow situation, the Board’s risk appetite, the current ROA, and others. Given that all pension systems’ liabilities are unique, there is no one correct answer. At Ryan ALM, we are happy to provide a detailed analysis on what could be done and at what cost to the plan. We do this analysis for free. When can we do yours?