Tag Archives: cash-flow-matching

05.22.26
by

The Benefit of Higher U.S. Interest Rates

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

Rising interest rates can often create stresses in an economy and within the capital markets. They certainly make financing big ticket items more painful. They can destabilize equity markets, although it seems as if the current equity market is immune to any risk at this time. They harm most fixed income managers/strategies, as rising rates lower the present value of their bonds.

However, rising rates are GREAT for cash flow matching (CFM) strategies, as the higher rates reduce the cost of those future pension promises (benefit payments). We were recently asked by a public pension fund to provide them with an analysis of what CFM could potentially do for them in this environment. They provided us with the requisite data – projected benefits, expenses, and contributions as far into the future as possible – which we then ran through our cost optimization model that we call the Liability Beta Portfolio (LBP).

The output is compelling! We can secure this fund’s net (after contributions) liabilities (all of them!) through September 30, 2053. The future value (FV) of those liabilities is $86.2 million. However, the plan needs to set aside only $50.1 million in present value (PV) assets to defease those liabilities with certainty. The $36.1 million cost reduction is locked in on the day that the portfolio is created. That “savings” equates to a cost reduction of 41.9%!

So, this plan sponsor can now SECURE pension payments for 27-years. The residual assets not needed in the CFM portfolio can now grow unencumbered. If I were them I’d just buy a S&P 500 ETF creating considerable savings from lower management fees and far less complexity. Furthermore, the plan sponsor now knows what contributions will look like for the next nearly three decades. They won’t have to be alarmed should markets suffer a deep and extended correction, as the assets AND liabilities will move in lockstep.

By the way, these benefits were achieved without taking substantial risk, as our process only uses investment-grade corporate bonds rated BBB+ or better. Defaults, which are the only risk within the strategy, have been 0.2% (2/1000 bonds) annually for the last 40-years according to S&P.

Why use CFM? The benefits are incredible, including; certainty, security, all the necessary liquidity, an extended investing horizon, lower management fees, stable contributions, and improved sleep! If these benefits sound attractive to you, provide us the same info that our public fund prospect did (see above) and we’ll provide you with a free analysis, too. We are confident that you’ll be as blown away as they were and the many clients that we are proud to support.

05.14.26
by

Bonds as Performance Drivers? No, Sir!

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

U.S. fixed income benefitted tremendously from the nearly 4-decade decline in interest rates. From 1981 through 2021, the U.S. enjoyed a significant collapse in bond yields helping to fuel an unprecedented rally in risk assets. However, as Bob Dylan said, “the times they are a changin”!

The U.S. Federal Reserve’s FOMC announced on March 16, 2022, that the new Fed Fund’s target would be 0.25%-0.5% beginning on St. Patrick’s day 2022. This action marked the beginning of a rate regime change resulting from Covid-19 implications, including abundant stimulus creating massive demand for goods and services that couldn’t be met as production/manufacturing activities were disrupted.

The U.S. Fed Fund’s rate would eventually rise to 5.25%-5.50% in July 2023 (following 11 rate increases). Today, the Fed Fund’s rate stands at 3.5%-3.75%. For context, the average Fed Fund’s rate since 1971 is 5.39%, which includes a peak of nearly 20% in December 1980, and ultimately 0% in December 2008, in reaction to the GFC. It would once again hit 0% during Covid.

As a result, bond investors, such as pension plans, have ridden a rollercoaster of performance. Performance looked terrific for much of the nearly 40-year bull market but has been challenging since the Fed’s initial action in 2022. In fact, the Aggregate Index (Lehman, Barclays, Bloomberg, etc.) has produced only a 3.3% return for 20-years through March 2026. It is worse if you look at shorter timeframes, as the Index was up only 1.7% for 10-years, 0.3% for 5-years, and -0.1% YTD (all through March 31, 2026).

For pension plan sponsors and their advisors who are reluctant to utilize cash flow matching (CFM) as it might harm the pension plan’s ability to achieve the ROA, those performance #s above should be a wake-up call! As a reminder, the YTM of a CFM portfolio is a good proxy for what the fund will achieve for the period that liabilities are defeased. Given that Ryan ALM, Inc. is currently generating a YTM of 5.02% for a client with a 30-year defeasement and a 4.6% YTM for another with a 10-year CFM mandate, which result do you think is more harmful to the pension plan?

Furthermore, the CFM portfolio’s return is not predicated on the direction of interest rates, as it very much is with active core fixed income strategies. Importantly, CFM provides all the liquidity needed to meet the monthly benefit payments without having to sell assets, perhaps at inappropriate times. By cash flow matching bond principal and interest income with the plan’s liability cash flows (benefits and expenses), CFM secures the pension promises and reduces the FV cost (with certainty) of those obligations in the process. For the client with the 30-year CFM mandate, we are reducing future funding costs by -31.1% and for the 10-year CFM program, we have reduced funding cost by -28.0%.

Where are we today? After a brief respite, U.S interest rates are once again trending higher, as greater inflation takes hold. Who knows where inflation and interest rates will eventually land, but a pension plan (or E&F) could benefit tremendously in this environment by engaging Ryan ALM, Inc. and our CFM capability. The 30-year Treasury bond yield history below highlights the rising rate environment. As a reminder, Ryan ALM builds CFM portfolios using investment-grade corporate that have yields substantially higher than comparable Treasury maturities.

So, I ask: Why sit with active fixed income and subject your plan’s bond allocation to the whims of an unknown interest rate environment when you can SECURE the pension promise with near certainty (absent any defaults)? Wouldn’t it be wonderful to know that your liquidity needs are all set for some prescribed period? Wouldn’t your plan participants want to know that the promises given have been secured? Now is the time to bring an element of certainty to the management of pension assets that doesn’t currently exist. Given the geopolitical uncertainty and the potential impact on inflation, rates, and other markets, creating funding certainty should be priority #1. Why isn’t it?

05.11.26
by

Milliman: Corporate Pension Funding Highest Since 2007

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

Milliman has once again released its monthly Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. It would be fascinating to see how these 100 plans differ from a list just 20-years ago.

As for today’s members, the Milliman 100 PFI plans showed improved funding by $23 billion during April. These stellar results were driven by strong equity returns as the constituents averaged a 2.13% gain. As a result, the funded ratio dramatically improved from 105.9% at the end of March to 107.8% at the end of April representing the highest level of funding since October 2007, when it stood at 108.1%. Strong investment gains increased assets by $20 billion and now stand at $1.297 trillion, while the projected benefit obligation fell slightly to $1.204 trillion, as the monthly discount rate edged up one basis point, to 5.66% from 5.65%. 

“After a flat first quarter, the funding surplus grew to $94 billion at the end of April, primarily due to strong market returns,” said Zorast Wadia, author of the Milliman 100 PFI. “This means plan sponsors continue to have more pension risk management options as plans move further into surplus territory.”

Plan sponsors would be wise to seek risk reducing strategies. The previous high watermark was achieved in October 2007, just prior to the start of the Great Financial Crisis, which pummeled markets through March of 2009. As the graph below highlights, the Milliman 100 went from a small surplus in the Q3’07 to a major deficit within 6 months. It would be another 13-years before a surplus was once again created.

Plan sponsors should secure the pension promises through a cash flow matching (CFM) strategy and then actively manage surplus assets since they’ve now created a much longer investing horizon for those assets. Ryan ALM, Inc. is always willing to provide a free analysis of what is possible through CFM.

For the full Milliman report, click on the link below.

View this month’s complete Pension Funding Index.

05.07.26
by

Unique Liabilities Require A Unique Solution

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

Most pension plans have exposure to fixed income. Perhaps not as much as they did prior to 2000, but today’s common thinking is that the current exposure is enough to act as a buffer should equity markets not continue along this momentum fueled path, and finally, to support the monthly liquidity needs of the fund. But are those the right reasons to use bonds and what type of fixed income should be used to accomplish those objectives?

We observe that most funds use a variety of investment grade bonds (Treasuries, Agencies, Corporates, etc.) and they have that collection benchmarked to a generic index such as the Bloomberg U.S. Aggregate Index (a.k.a. the Agg). As a reminder, the Agg was created by Ron Ryan when he was Head of Research at Lehman Brothers a few years ago. But, again, is this the right approach? We at Ryan ALM, Inc. believe that bonds should only be used for their cash flows (principal and interest) and not as a performance driver. Bonds are perhaps the only asset class with a known cash flow equal to the value at maturity (PAR) and contractual interest payments. Those known cash flows can be modeled to meet the plan’s ongoing liability cash flows (benefits + expenses). 

Which brings me to the point that every pension plan’s liabilities are unique, and as such, no generic index such as the Agg could possibly match a plan’s liabilities. If the asset cash flows don’t match and fund the liability cash flows (benefits and expenses), the plan is subject to unnecessary interest rate risk. Again, given that every pension plan has a unique set of liabilities this would suggest that each pension plan needs to have an investment strategy created specifically for their cash flow needs. Cash Flow Matching (CFM) is an investment strategy with a very long and successful history. An appropriately crafted CFM portfolio will meet and fully fund chronologically the liability cash flows as far into the future as the allocation to the CFM strategy lasts.

We take great pride in our proprietary CFM optimization modeling, which we began using at Ryan ALM’s founding in 2004. Having the ability to tailor unique solutions to client specific issues/requests is a hallmark of our firm, and this capability is being recognized throughout the industry. In fact, we recently received this feedback from an ALM expert at a large asset/liability consulting firm, who stated that I’m “impressed with the team’s ability to build portfolios for such non-standard cashflow streams.” Thank you!

We’d be happy to demonstrate our capability and we’re always willing to provide a free analysis highlighting how your fund could benefit through CFM and Ryan ALM’s expertise. Just call us.

05.04.26
by

Why Wouldn’t You Prefer a SD of +/-0%?

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

I continue to be surprised that more pension plans don’t embrace greater certainty in the management of their funds. The Iran War is leading to great uncertainty related to inflation, interest rates, and economic growth. Yes, U.S. equities have enjoyed a healthy recovery following the initial outbreak in the Middle East, but is that sustainable?

Callan does a good job of providing a regular review of what asset allocation would be necessary to achieve a 7% return and the risk (measured as standard deviation) to achieve that return objective. Callan indicated that it was very easy to achieve a 7% return all the way back in 1994 when U.S. interest rates were higher than they are today. In fact, an allocation of 85% to fixed income and small allocations to L.C. equity, SC equity, and int’l stocks would have produced a 7% return with only a 5.6% annual standard deviation.

However, in the most recent update from 2024, Callan suggests the following asset allocation is necessary to achieve a 7% return:

This means that 68% of the time, a plan sponsor should expect an annual return of 7% +/- 8.6%. At two standard deviations (95% of the observations or 19/20 years), the annual return will fall between +/- 17.2% of the 7% target. Would you be comfortable knowing that your fund could generate an annual return of -10.2%? Think about the impact a return like that would have on contributions?

What if I said that cash flow matching (CFM) a portion of your pension fund would result in those assets having an annual SD of 0% barring a default which occurs at a rate of 0.18% annually among investment grade corporate bonds for the last 40-years. How’s that possible? When CFM is implemented, the plan’s asset cash flows and matched agains the plan’s liability cash flows (benefits and expenses). They mover in lockstep with each other no matter where rates go. Today’s U.S. interest environment is attractive and getting more attractive as I write this post, as the 30-year Treasury bond yield has topped 5% (5.02% at 11:47 am DST). Higher rates are great for CFM, as they lower the present value of those future promises.

Furthermore, the use of a CFM portfolio secures the pension promises, dramatically improves plan liquidity, eliminates interest rate risk for the portion of the plan, extends the investing horizon for the residual plan assets, and reduces the cost of those future pension promises. Again, why wouldn’t you embrace an element of certainty?

I’m not sure what the Callan team would identify as the proper allocation to achieve a 7% return today, but I suspect that the annual standard deviation is greater than the 8.6% from 2024. Every time a pension plan falls short of the annual ROA, contributions must increase to make up for the shortfall. Greater investment certainty, like that associated with using CFM, reduces the likelihood that the pension plan sponsor with suffer from a negative surprise associate from increased contributions.

05.01.26
by

Is Now Really the Time to Buy Stocks?

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

U.S. equity markets enjoyed a robust April despite myriad economic and geopolitical inputs that might have given investors pause. Should equity investors remain bullish at this time? The graph below caught my attention primarily because of the recent disconnect between the two lines related to the Shiller Excess Cape Yield (ECY) and subsequent 10-year Real Return for equities. There are many, many valuation tools that claim to provide clues about the future direction of stocks, and this is such an example. Those tools can be short-, medium-, and long-term in nature. The ECY happens to be one valuation metric that provides “guidance” for longer time frames. The current reading of 1.60% certainly looks rich relative to its long history.

In case you don’t know, the Shiller excess CAPE yield is a valuation measure that compares the stock market’s earnings yield with the “real” yield on the 10-year Treasury note. In simple terms, it asks how much extra return stocks may offer over inflation-adjusted government bonds.

How it is calculated

  • Take the inverse of the CAPE ratio, which is the market’s “earnings yield.”
  • Subtract the real 10-year Treasury yield.

So, ECY=(1/CAPE)−10-year real Treasury yield

A higher excess CAPE yield suggests stocks might look more attractive relative to bonds. A lower reading suggests the equity risk premium is thinner, meaning stocks offer less return versus bonds. As mentioned above, current readings show the S&P 500 Shiller Excess CAPE Yield around 1.60% for April 2026, which is well below its long-term average of 4.60%. Another data source put it at 1.41 as of April 30, 2026.

Investors have historically used the ECY as a long-term asset allocation tool, especially when comparing stocks with Treasury bonds. It is not a short-term trading signal, but rather a rough guide to whether equities look cheap or expensive relative to real bond yields. A CAPE yield below 2% has generally signaled subdued future equity returns over the next 5 to 10 years, providing a valuation warning sign, and not an exact measure.

As a reminder, there are many valuation techniques used to identify opportunities and risk when investing in U.S. equities. Depending on a pension plan’s liquidity needs, funded ratio, willingness to take risk, etc. today’s current environment may be providing an opportunity to reduce risk by trimming equities and using the proceeds along with core fixed income assets to establish a cash flow matching mandate. In the process, the plan’s liquidity is improved, promised benefits secured, and the investing horizon extended for the residual assets. Give us a call. We are always willing to provide a free analysis showcasing how CFM can help your fund.

04.16.26
by

Pension Game: Find the Liabilities?

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

I can remember as a child playing the games hide-and-seek and manhunt among myriad activities with my friends in Palisades Park. We would play for hours. It was particularly exciting as daylight waned just before we were beckoned home when the streetlights flicked on.

Those games were innocent and most of the time no one got hurt. However, Ron Ryan, Ryan ALM’s Chairman, has written about another game. In this competition, he’s challenging pension professionals to “find the liabilities”. Why? Unfortunately, most of the effort put forth by pension professionals (outside of actuaries) is focused on assets: the allocation, manager selection, and performance. But is that the correct approach? Of course not.

The only reason that a pension plan exists is because of a promise that has been made to the plan participant. Pre-funding that promise through a pension system is a most effective approach to meeting those future obligations. As a result, that promise needs to be the focal point of pension management, but it rarely is. Unfortunately, most folks think that managing a pension is all about returns. How has the fund performed relative to the return on asset (ROA) assumption.

As Ron points out in this excellent piece, if all the investment managers/strategies outperform their generic asset specific benchmarks, but the total fund underperforms its liability growth rate, has the fund won? Of course not. That’s why we believe that the primary objective in managing a DB pension plan should be to SECURE the promises at a reasonable cost and with prudent risk.

As I mentioned earlier, the games that I engaged in as a child in New Jersey were innocent. Failure to understand what a plan’s liabilities look like could be much more harmful. We’ve seen that scenario play out many times and with significant consequences. Don’t let your fund become the victim of an assets-only approach.

03.25.26
by

What is My Funded Ratio? Who Cares!

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

The funded ratio of a DB pension plan gets a lot of attention, especially if it is perceived to be weak. But does the funded ratio truly tell you the whole story as to the financial health of a DB pension plan? We, at Ryan ALM, Inc. don’t think so.

So, how is the funded ratio calculated:

Funded ratio = MV of plan assets / plan liabilities earned to date X 100

The market value of assets is a present value (PV) calculation. The market value of liabilities is the future value of liabilities earned to date discounted back to a PV calculation based on a discount rate. For public and multiemployer plans the discount rate tends to be the fund’s return on asset assumption (ROA), while it is an AA corporate blended rate for private pensions. In today’s interest rate environment, the discount rate for private plans will be roughly 1.5% less than the discount rate based on the average ROA. That means that liabilities for private funds will have a greater current value than the value of liabilities calculated based on the discount rate using the ROA. Oh, okay, so the choice of a discount rate can change my funded ratio. That’s interesting. So that tells me that if I wanted to improve my funded ratio, all I’d have to do is increase my discount rate to lower the PV of my liabilities. That’s very interesting.

So, it appears that the funded ratio calculation can be manipulated to some extent. As we think about the formula above, is there anything missing? Yes, where are the future contributions, which can be significant. Why are future payment liabilities in the calculation, but projected contributions, which are future assets of the fund, not included? Common thinking suggests that those future contributions aren’t guaranteed, which is why they aren’t factored into the funded ratio calculation. However, is that a correct assumption? In doing some research, it appears >80% of DB pension funds receive 100% of the annual required contribution (ARC). Even NJ’s public pension system is making the ARC and then some.

We recently had a conversation with a large plan sponsor who thought that their fund was <50% funded based on the formula above. Not surprisingly, they were very focused on this ratio and looking for investment strategies that could potentially enhance it. As an FYI, this plan’s future contributions as forecasted by their actuary were significant. In fact, future contributions were so large that they were equal to 73% of the forecasted liabilities! Yes, without including the pension fund’s current assets, this plan was 73% funded, provided those projected contributions were met which they have been for more than a decade.

So, given these forecasted contributions is that pension fund really <50% funded?

In another example, the same fund that thought that they were poorly funded, could defease net pension liabilities for the next 33-years. How is it possible that a plan that believes it is <50% funded able to significantly reduce risk, enhance liquidity, and SECURE pension promises for 33-years? Furthermore, this fund was going to establish a $4.4 billion surplus on the day that those benefits and expenses were defeased for 33-years. If it just earned the projected ROA, that $4.4 billion would grow to $34.2 billion during that 33-year period. Wow! 

So, I ask once more, does that sound like a plan in financial distress, which a funded ratio of <50% might suggest? NO!

The funded ratio is but one measure of a pension plan’s health. Unfortunately, many in our industry would look at that # and say that more risk needs to be taken to achieve “full funding” down the road, when in fact reducing risk through a cash flow matching (CFM) strategy is the appropriate approach. It is past the time to get off the scary asset allocation rollercoaster. 

03.17.26
by

What Would You Do?

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

Happy St. Paddy’s Day to my Irish friends (I’m 1/2 Irish) and those that would like to be. May the luck of the Irish embrace you today.

As many of you know, we are always willing to provide to the pension and E&F communities a free analysis to highlight how a Cash Flow Matching (CFM) mandate could secure the promised benefits/grants for your fund and importantly, provide the necessary liquidity to meet future promises. In many cases, we will produce multiple runs covering a variety of periods usually 5-years to 30-years. Often the sponsor of the fund is shocked by the potential cost reduction of those future obligations.

We recently provided a large pension plan with several potential implementations, as they try to improve the fund’s liquidity profile, while also desiring to secure those future promises. Here are three scenarios that we provided to them and I’d welcome your feedback on what you would do.

Scenario #1 – Provide a CFM portfolio using the core fixed income allocation ($3 billion/15% of total assets) to match and fund the NET (after contributions) liability cash flows of benefits and expenses (B&E). In this scenario, we can cover the next 6-years of B&E through 6/30/32, covering $3.44 billion in FV benefits and expenses for $3.0 billion (a cost reduction of $443.3k or 12.88%). The YTM on the portfolio is 4.09 and the duration 3.09 years, with the average quality being A-. The remaining assets can continue to be managed as they currently are, but they now benefit from a 6-year investing horizon in which they are no longer providing any liquidity to meet monthly obligations.

Scenario #2 – Provide a CFM portfolio using the same $3 billion (only needed $2.96 billion) or 15% of the fund’s total assets, but implement the strategy using a vertical slice of the liabilities going out 30-years. In this example, we can cover 22% of the liability cash flows for the next 30-years. The FV of those liabilities are $6.3 billion (as opposed to the $3.44 billion using 100% CFM for 6-years). We can reduce the FV cost by $3.33 billion or 53%. The remaining 85% of the fund’s assets can be managed as they presently are, but they don’t benefit from the longer investing horizon, as they will be called upon to provide liquidity to meet the residual B&E.

Scenario #3 – 100% CFM covering net liabilities through 6/30/59. In this case we showed that we can cover 100% of the NET B&E for $9.9 billion in assets, while providing the plan with a $4.4 billion surplus. The FV of those B&E through 2059 are reduced by about $13 billion or 56%! The surplus assets now have a 33-year investing horizon to just grow and grow! A modest 6.5% annualized return for that period produces a surplus of $34.2 billion that can be used to fund B&E after 2059, enhance benefits, and/or reduce future contributions. An 8% annualized return produces a surplus >$75 billion. Oh, my! Also, in this scenario, the organization ONLY needs an annual 2.56% return on the remaining assets to fully fund ALL projected B&E well beyond 2059, as determined by our Asset Exhaustion Test (AET).

Importantly, these scenarios only work if the sponsoring entity provides the forecasted contributions, which in this case they have consistently done for the past 10+ years.

So, I ask once again, what would you do? Scenario 1 ($3 billion/15% of total assets) provides a 100% coverage for 6-years while reducing cost by 13%. Scenario 2 reduces the cost of FV B&E by 53% or $3.4 billion, but covers only 22% of the liabilities, while Scenario 3 reduces the FV cost by 56%, while securing the net promises through 2059 for a cost of $9.9 billion resulting in a surplus of $4.4 billion.

I guess that there is a fourth scenario which is to do nothing, but why would you want to continue to ride the proverbial performance rollercoaster that only guarantees volatility and not success when you can secure a portion of the liabilities, significantly reduce the cost of those future promises, improve liquidity, and “buy time” for the residual assets to just grow unencumbered?

As the Irish say – “May the most you wish for be the least you get“.

02.18.26
by

Good Question!

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

We occasionally post questions received in reaction to our blogs in new blog posts since many of our readers might have similar thoughts/ideas. In reaction to yesterday’s post, “All-time High Funded Ratio” a reader calling themselves LoudlyObservant (great name) stated the following:

Why wouldn’t such well-funded plans take steps to lock in the funding of their beneficiary payments through a cash flow matching portfolio? Isn’t the first fiduciary duty of loyalty expressed in controlling the relevant risk to the beneficiaries, which involves BOTH securing adequate assets and then actually funding the payments? Many of these plans have hit the first goal but are still exposed to funding risk. With a ready solution at hand, the plan sponsors open themselves to criticism for not acting on their second responsibility.

Thank you, Loudly! Great questions and observations. We often talk about the fact that pension plans at all funding levels need liquidity, not just well-funded plans, but when you have a universe of plans that on average are fully funded, why not dramatically reduce risk. We witnessed what happened to DB pension plans at the end of 1999, when most plans were well overfunded only to see the funded status plummet and contribution expenses explode following two major market corrections.

I’m neither smart enough nor is my crystal ball better than anyone else’s to know if a major market correction is on the horizon but why take the chance unnecessarily. We’ve seen a significant percentage of Special Financial Assistance (SFA) recipients engage in cash flow matching to secure the SFA assets and the benefits that they will protect. Why not adopt CFM for the legacy assets, too? As we’ve mentioned, we are providing a service to you and your plan participants. It isn’t just another product. Time to get off the proverbial rollercoaster of returns and secure the promises and your plan’s funded status.