Tag Archives: cashflowmatching

04.03.24
by

What Are the Stats Telling Us?

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

Mark Twain quoted Benjamin Disraeli in his 1907 autobiography, when he stated “Lies, damned lies, and statistics” as a phrase used to describe the persuasive power of statistics to support weak arguments. Folks who regularly read my posts know that I am a frequent user of statistics to support my arguments, whether they are strong or weak. As a young man, I would study the sports section box scores and the backs of my baseball cards for every possible stat. It is just who I am. I love #s!

The investment management industry is inundated with statistics. You can’t go a day without a meaningful insight being shared in reference to our industry, the economy, interest rates, politics, companies, commodities, etc. I try to absorb as many of these stats as possible. However, it is easy to fall prey to confirmation bias, which humans are prone. Putting a series of statistics together and building an investment case is never easy. That said, we at Ryan ALM, Inc. have been saying since the onset of higher rates that the US Federal Reserve would likely be forced to keep rates higher for longer, as inflation would remain stickier than originally forecast.

We also didn’t see a recession on the horizon due to an incredibly strong US labor market, which continues to witness near historic lows for unemployment. Despite the retiring of the Baby Boomer generation, the labor participation rate is up marginally during this period of higher rates, indicating that more folks are looking for employment opportunities at this time. They are being supported by the fact that job openings remain quite elevated relative to pre-Covid-19 levels at roughly 880k. When people work, they spend! Wage growth recently surprised to the upside. Will demand for goods and services follow? It usually does.

Furthermore, as we’ve disclosed on many occasions, financial conditions are NOT tight despite the rapid rise in US interest rates from the depths induced by the pandemic. Long-term US rates remain below the 50-year average, and in the case of the US 10-year Treasury note, the yield difference is roughly -2.1%. Does that give the Fed some room to possibly increase rates should inflation remain elusive?

In just the past week, we’ve had oil touch $85/barrel, the Atlanta Fed’s GDPNow model increase its forecast for Q1’24 growth from 2.3% to 2.8%, a Baltimore bridge collapse that will impact shipping and create additional expense and delays, housing that once again exceeded expectations, Fed (Powell) announcements that a recession wasn’t on the horizon, job growth (ADP) that was the highest in 8 months, manufacturing that stopped contracting for the first time since 2022 (17 months), and on and on and… Am I kidding myself that our case for higher for longer is the right call? Am I only using certain stats to “confirm” the Ryan ALM argument?

We don’t know. But here is the good news. Our investment strategy doesn’t care. As cash flow matching experts, we are agnostic as to the direction of rates. Yes, higher rates mean lower costs to defease those future benefit promises, so higher rates are good. However, once we match asset cashflows of interest and principal to the liability cash flows (benefit payments and expenses), the direction of rates becomes irrelevant, as future values are not interest rate sensitive. Building an investment case for cash flow matching was challenging when rates were at historic lows. It is much easier today, as one can invest in high quality investment-grade corporate bonds and get yields in the range of 5%-5.5%, which is a significant percent of the average return on asset assumption (ROA) with much less risk and volatility of investing in equities and other alternatives.

I don’t personally see a case for the Fed to cut rates in the near future. I think that it would be a huge mistake to once again ease monetary policy before the Fed’s objective has been achieved. I lived through the ’70s and witnessed first-hand the impact on the economy when the Fed took its collective foot off the brake. As a result, I entered this industry in 1981 when the 10-year Treasury yield was at 14.9%. The Fed can’t afford to repeat the sins of the past. I believe that they know that and as a result, they won’t act impulsively this time.

04.01.24
by

ARPA Update as of March 29, 2024

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

Good morning, and welcome to a new month/quarter. Still feels like winter in the northeast! But there has been a thaw with regard to activity at the PBGC as they implement the ARPA legislation.

Happy to report that the Pension Plan of the Moving Picture Machine Operators Union Local 306 and the New England Teamsters Pension Plan both submitted applications seeking SFA. The Machine Operators, a priority group 5 member, is seeking $19.4 million for its 542 participants, while the NE Teamsters are hoping to capture more than $5.4 billion in SFA for just over 72k plan members. If the NE Teamsters are successful, they will have received the second largest grant to date only trailing the Central States Teamsters whopping $35.8 billion. To date, there have been 5 awards of greater than $1 billion. Currently, there are four plans seeking >$1 billion that are under review including the NE Teamsters.

In other news, the United Food and Commercial Workers Union Local 152 Retail Meat Pension Plan, had its application approved for an SFA grant of $279.3 million which will support the benefits for 10,252 members. There were no applications denied or withdrawn during the previous week. In addition, there were no pension funds added to the waitlist that continues to have 86 potential applications waiting to submit an application from the initial 113 members.

The upcoming week will provide some insight into the continuing strength of the US labor market with the ADP and US employment releases as well as the weekly initial claims data. However, it doesn’t appear that market participants are waiting to see what those data sets reveal as US Treasury bonds and notes are seeing a big move up in yields today. This movement hurts total return focused fixed income products, but it provides those pension plans with more attractive yields for cash flow matching assignments. Higher yields mean lower cost to defease future benefit payments. Very nice!

03.25.24
by

ARPA Update as of March 22, 2024

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

“March Madness” is upon us. How’s your bracket doing? I still have my champion in the running, but not much more than that.

The past week was very quiet with regard to the ARPA legislation and activity associated with its implementation. We did have one fund submit an application for Special Financial Assistance (SFA). United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Plan, a Priority Group 6 member, submitted a revised application on March 16th. This fund is seeking SFA in the amount of $638.3 million for the fund’s 29,233 members. The PBGC will now have until July 14, 2024 to act on the application.

Besides the filing by the UFCW, there was little to show last week, as there were no applications approved, denied, or withdrawn. Furthermore, unlike the prior week, there were no additions to the waitlist which continues to have 113 funds listed of which 27 have been invited to submit an application. To-date, 71 funds have received SFA in the amount of $53.6 billion. These proceeds include the grant, interest, and any FA loan repayments.

Like the picking of the NCAA tournament bracket, for which there are no perfect submissions remaining, the capital markets are highly uncertain. Yes, the US equity market has enjoyed a robust 5-6 months period, but how predictive is that for the next six months or longer? Those yet to receive the SFA should seriously consider an investment strategy that takes the uncertainty of the markets out of the equation. I am specifically referring to the use of investment grade bonds to defease the promised benefit payments as far into the future that the SFA allocation will cover. Once the matching of asset cash flows to the plan’s liability cash flows is done, that relationship is locked in no matter what transpires in the capital markets. Any risk taken by recipients of these assets should be done in the legacy portfolio where a longer investing horizon has been created. Fortunately, US interest rates remain elevated significantly from when the ARPA program began in 2021. The timing couldn’t have been better.

03.18.24
by

Overpayment of SFA to be Refunded

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

As those who regularly follow the Ryan ALM Inc. blog know, we report each week on the status of the PBGC’s effort to implement the ARPA legislation for multiemployer plans. In those updates, we have been reporting that the apparent slowdown in the processing of the special financial assistance (SFA) applications had to do with incorrect population surveys funds that have filed applications and in some circumstances have received SFA payouts.

We are finally starting to get some clarity on the situation in terms of who is involved and what is required of the funds that have received excess SFA grant money. In the most notable example, Central States, Southeast & Southwest Areas Pension Plan (CS) which received $35.8 billion in SFA in December 2022, has been informed that an excess SFA payment of $127 million was granted. This was the result of including 3,479 deceased participants in the eligible population. As a result, CS is required to repay the excess grant proceeds.

According to the Department of Labor, there are no consequences for those plans that have received excess grant money provided that they return those funds. According to a ai-cio.com article, “the DOL noted that this mistake was not made by the pension plan.” Unfortunately, the PBGC did not use the Social Security Administration’s death master file (DMF), a database that pension plans can’t access, when initially auditing SFA applications. They have since begun to use the DMF as of November 2023. “While these excess payment amounts may represent only a small fraction of total SFA payments, they would not otherwise have been paid and, as such, must be refunded to the United States government,” the PBGC said in a statement.

03.12.24
by

Corporate Pension Funding Continues to Improve

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

The Milliman organization does a terrific of providing frequent and very useful updates through their Milliman 100 Pension Funding Index (PFI). They are reporting that the funded status improved by $26 billion in February for the largest 100 corporate defined benefit pension plans. The funded status at the end of February sat at 104.9% up from 102.8% at the end of January 2024.

All of the improvement in the funded status is the result of a higher discount rate that reduced the present value of those future pension promises. Unlike public pension plans, corporate accounting uses a AA corporate rate to value liabilities and not the ROA. Assets don’t need to rise in order for pension funds to show improvement in the funded status. In fact, during the month, Milliman estimates that liabilities fell in value by $30 billion. The current funding surplus for the members of this index stands at $63 billion at month end.

What’s next for these companies? Much of Corporate America has already begun to de-risk their plans. For those that haven’t the time is now to consider taking some risk out of the asset allocation. We certainly don’t want to see a repeat from 1999, when pensions were well over-funded on to see that funded status deteriorate rapidly with the advent of two major equity market declines. Importantly, de-risking doesn’t mean getting out of the pension game. it does mean that you, as the sponsor, don’t want to continue to ride the asset allocation rollercoaster up and down which can impact contribution expenses.

Migrate your fixed income from a return-seeking mandate to one that is now going to use bond cash flows of interest and principal to match the liability benefit payments. In an uncertain environment as to the direction of US interest rates, utilizing a cash flow matching (CFM) strategy will lock up the relationship with those pesky liabilities and eliminate interest rate risk for that portion of the portfolio. How comforting is that?

03.08.24
by

A Contrarian Approach That is Becoming More Common?

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

I suspect that some (perhaps) many folks in our industry are becoming a little tired of my constant drum beat requesting a change in how pension plans are managed. I’m sorry if that is the case, but I have a reason to speak out often, if not loudly. My goal/mission, and that of Ryan ALM, Inc., is to protect and preserve defined benefit plans for the masses. I believe wholeheartedly that DB plans are superior to any other retirement program since they provide the monthly promise with little involvement from the participant, who may have particularly wonderful skills used in their day-to-day lives, but investing isn’t likely one of them.

By espousing Cash Flow Matching (CFM) as an important investment strategy, particularly in this period of attractive interest rates, we are bringing pension management generally and asset allocation strategies specifically back to its roots. The SECURING of the pension promise must be the primary objective for plan fiduciaries. Better yet, it should be accomplished at a reasonable cost and with prudent risk. As I’ve discussed before, a CFM strategy brings an element of certainty to the management of pensions that have embraced uncertainty through asset allocation strategies that are subject to the whims of the markets.

The riding of the asset allocation rollercoaster in pursuit of a performance objective does little to secure the pension promise, but it certainly adds to annual volatility of both the funded status and contribution expenses. Is that the outcome that the sponsors of these plans and the participants want? Heck no! Are we at Ryan ALM tilting at or own windmills? I sure hope not.

I’ve been heartened recently to read several articles favoring a return to pension basics, including the focus on the pension promise to drive asset allocation through a CFM implementation. I’m not afraid to be a lone wolf, and nearly 1,400 blog posts support that claim, but it is comforting to have some company, as being a contrarian outside of the “herd” has been described as being as painful as chewing off one’s left arm – OUCH! In one specific instance, Stephen Campisi, recently posted his article on LinkedIn.com, in which he espoused a similar bifurcated approach – liquidity and growth buckets – to pension asset allocation. He also reminded everyone that “aiming” at the correct objective was essential. In this case, he correctly cited that the objective was the promise that had been given to the participant.

Nothing would please me more than to have the entire industry once again realize the significant importance of the defined benefit plan and its role in securing a dignified retirement. Eliminating the rollercoaster cycles of performance will go a long way to preserving their use. Adopting a CFM strategy that secures the monthly promises at a reasonable cost and with prudent risk is the first step in the process. I look forward to you jumping on our bandwagon.