Tag Archives: cfm

06.20.25
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Why? – Revisited

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

My 44-year career in the investment industry has been focused on DB pension plans, in roles as both a consultant and an investment manager (I’ve also served as a trustee). I’ve engaged in 000s of conversations related to the management of DB pension plans covering the good, the bad, and even the ugly! I’ve published more than 1,600 mostly pension-related posts on this blog with the specific goal to provide education. I hope that some of my insights have proven useful. Managing a DB pension plan, whether a private, public, or a multiemployer plan is challenging. As a result, I’ve always felt that it was important to challenge the status quo with the aim to help protect and preserve DB pensions for all.

Unfortunately, I continue to think that many aspects of pension management are wrong – sorry. Here are some of the concerns:

  • Why do we have two different accounting standards (FASB and GASB) in the U.S. for valuing pension liabilities?
  • Why does it make sense to value liabilities at a rate (ROA) that can’t be purchased to defease pension liabilities in this interest rate environment?
  • Why do we continue to create an asset allocation framework that only guarantees volatility and not success?
  • Why do we think that the pension objective is a return objective (ROA) when it is the liabilities (benefits) that need to be funded and secured?
  • Why haven’t we realized that plowing tons of plan assets into an asset class/strategy will negatively impact future returns?
  • Why are we willing to pay ridiculous sums of money in asset management fees with no guaranteed outcome?
  • Why is liquidity to meet benefits an afterthought until it becomes a major issue?
  • Why does it make sense that two plans with wildly different funded ratios have the same ROA?
  • Why are plan sponsors willing to live with interest rate risk in the core bond allocations?
  • Why do we think that placing <5% in any asset class is going to make a difference on the long-term success of that plan?
  • Why do we think that moving small percentages of assets among a variety of strategies is meaningful?
  • Why do we think that having a funded ratio of 80% is a successful outcome?
  • Why are we incapable of rethinking the management of pensions with the goal to bring an element of certainty to the process, especially given how humans hate uncertainty?

WHY, WHY, WHY?

If some of these observations resonate with you, and you are as confused as I am with our current approach to DB pension management, try cash flow matching (CFM) a portion of your plan. With CFM you’ll get a product that SECURES the promised benefits at low cost and with prudent risk. You will have a carefully constructed liquidity bucket to meet benefits and expenses when needed – no forced selling in challenging market environments. Importantly, your investing horizon will be extended for the growth (alpha) assets that haven’t been used to defease liabilities. We know that by “buying time” (extending the investment horizon) one dramatically improves the probability of a successful outcome.

Furthermore, your pension plan’s funded status will be stabilized for that portion of the assets that uses CFM. This is a dynamic asset allocation process that should respond to improvement in the plan’s funded status. Lastly, you will be happy to sit back because you’ve SECURED the near-term liquidity needed to fund the promises and just watch the highly uncertain markets unfold knowing that you don’t have to do anything except sleep very well at night.

06.19.25
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Ryan ALM: Problem/Solution

By: Ronald J. Ryan, CFA, Chairman, Ryan ALM, Inc.

Problem:  Pension Liabilities… MIA

Solution:  Cash Flow Matching (CFM)

The true objective of a pension is to secure and fully fund benefits (and expenses) in a cost-efficient manner with prudent risk. Although funding liabilities (benefits and expenses (B+E)) is the pension objective, it is hard to find liabilities in anything that pertains to pension assets. Asset allocation is more focused on achieving a ROA (return on assets target return), and performance measurement compares assets versus assets, as the asset index benchmarks are void of any liability growth calculations. If you outperform your index benchmark does that mean asset growth exceeded liability growth? Perhaps NOT.

Pension liabilities behave like bonds since their discount rate is most similar to a zero-coupon bond yield curve (especially ASC 715 discount rates which are a AA corporate yield curve). Yes, public and multiemployer pension plans use the ROA as the discount rate to price their liabilities but even then it is not shown in any performance measurement reports. In fact, what shows up in the CAFR annual report is the GASB requirement of an interest rate sensitivity test by moving the discount rate up and down 100 basis points to determine the volatility of the present value of liabilities and the funded ratio. But a total return or growth rate comparison of assets versus liabilities seems to be MIA.

Ryan ALM solves this problem through our asset liability management (ALM) suite of synergistic products:

  1. Custom Liability Index (CLI) – The management of assets should actually start with liabilities. In reality, assets need to fund NET liabilities defined as (benefits + expenses) – contributions. Contributions are the first source to fund B+E. Assets must fund the net or residual. This is never calculated so assets start with little or no knowledge of what there job really is. Moreover, B+E are monthly payments, which are also not calculated, as the actuary provides an annual update. The CLI performs all of these calculations including total return and interest rate sensitivity as monthly reports.
  1. ASC 715 Discount Rates – Ryan ALM is one of very few vendors who provide ASC 715 discount rates, and we’ve done so since FAS 158 was enacted (2006). We provide a zero-coupon yield curve of AA corporate bonds as a monthly excel file for our subscribers including a Big Four accounting firm and several actuarial firms.
  1. Liability Beta Portfolio™ (LBP) – The LBP is the proprietary cash flow matching model of Ryan ALM. The LBP is a portfolio of investment grade bonds whose cash flows match and fully fund the monthly liability cash flows of B+E. Our LBP has many benefits including reducing funding costs by about 2% per year (20% for 1-10 year liabilities). The intrinsic value of bonds is the certainty of their cash flows. That is why bonds have always been chosen as the assets for cash flow matching or dedication since the 1970s. We believe that bonds are not performance or growth assets but liquidity assets. By installing a LBP, pensions can remove a cash sweep from the growth assets, which negatively impact their growth rates. We urge pension plan sponsors to use bonds for their cash flow value and transfer the bond allocation from a total return focus to a liquidity allocation. Moreover, the Ryan ALM LBP product is skewed to A/BBB+ corporate bonds which should outyield the traditional bond manager who is usually managing versus an index which is heavily skewed to Treasuries and higher rated securities that are much lower in yield. The LBP should enhance the probability of achieving the ROA by the extra yield advantage (usually 75 to 100 basis points). The LBP should also reduce the volatility of the funded ratio and contributions. In fact, it should help reduce contribution cost by the extra yield enhancement. 

For more info on the Ryan ALM product line, please contact Russ Kamp at  rkamp@ryanalm.com.

06.16.25
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The Power of Bond Math

By: Ronald J. Ryan, CFA, Chairman, Ryan ALM, Inc.

Bonds are the only asset class with the certainty of its cash flows. That is why bonds have always been used to cash flow match and defease liabilities. Given this certainty, bonds provide a secure way to reduce the cost to fund liabilities. This benefit is not as transparent or valued as one might think. If you could save 20% to 50% on almost anything, most people would jump at the opportunity? But when it comes to pre-funding pension liabilities there seems to be a hesitation to capture this prudent benefit.

Bond math tells us that the higher the yield and the longer the maturity… the lower the cost. Usually there is a positive sloping yield curve such that when you extend maturity you pick up yield. What may not be evident is the fact that extending maturity is the best way to reduce costs even if yields were not increased. Here are examples of what it would cost to fund a $100,000 liability payment with a bond(s) whose maturity matches the liability payment date:

Cost savings is measured as the difference between Cost and the liability payment of $100k. As you can see, extending maturity produces a much greater cost reduction than an increase in yield. More importantly, the cost reduction is significant no matter what maturity you invest at, even if yields are unchanged. The cost savings range from 21.9% (5-years) to 38.1% (10-years) and 62.8% (20-years) with rates unchanged. Why wouldn’t a pension want to reduce funding costs by 21.9% to 62.8% with certainty instead of using bonds for a volatile and uncertain total return objective? Given the large asset bases in many pensions, such a funding cost reduction should be a primary budget consideration.

Ryan ALM is a leader in Cash Flow Matching (CFM) through our proprietary Liability Beta Portfolio™ (LBP) model. We believe that the intrinsic value in bonds is the certainty of their cash flows. We urge pensions to transfer their fixed income allocation from a total return objective versus a generic market index (whose cash flows look nothing like the clients’ liability cash flows) to a CFM strategy. The benefits are numerous:

Secures benefits for time horizon LBP is funding (1-10 years)

Buys time for alpha assets to grow unencumbered 

Reduces Funding costs (roughly 2% per year)

Reduces Volatility of Funded Ratio/Status

Reduces Volatility of Contribution costs

Outyields active bond management

Mitigates Interest Rate Risk 

Low fee = 15 bps

For more info on our Cash Flow Matching model (LBP) or a free analysis to highlight what CFM can do for your plan, please contact Russ Kamp, CEO at rkamp@ryanalm.com

06.16.25
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ARPA Update as of June 13, 2025

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

I hope that you and/or the men in your life had a wonderful Father’s Day.

Regarding the ARPA legislation and the PBGC’s oversight, last week was fairly tame in terms of activity. There weren’t exciting developments such as approvals or submissions of applications, as access to the PBGC’s eFiling portal remains “limited”, which means that it “is open only to plans at the top of the waiting list that have been notified by PBGC that they may submit their applications. Applications from any other plans will not be accepted at this time.”

There were no applications denied, withdrawn, and no further recipients of the SFA required to repay a portion of the grant due to census errors. It has been a little over a month (5/5/25) since the last plan repaid a portion of the SFA. As I’ve mentioned several times, there likely aren’t many plans that still might be asked to return a portion of the grant monies.

So what did transpire during the previous week? Well, mutliemployer plans continue to be added to the waitlist. In fact, since April 30, 2025, twenty pension plans have been added to the list. In total, 136 pension plans have sought Special Financial Assistance through the waitlist path with 56 of those yet to file an application with the PBGC. Two of the recent waiting list additions to the waitlist have locked in the valuation date as of March 31, 2025. As a reminder, a “lock-in application will set the plan’s SFA measurement date and base data but has no impact on the process PBGC follows for accepting complete SFA applications for review”, per the PBGC.

Continuing uncertainty surrounding economic policies and geopolitical risks has U.S. Treasury yields hovering around cycle highs. This rising rate environment is not helpful to active core fixed income managers, but it is quite helpful to plan sponsors looking to secure the promised benefits through the SFA grants.

06.13.25
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One Can Only Hope!

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

The title of this post could be used to discuss any number of uncertainties that we are currently facing including geopolitical risk, economic risks associated with potentially disruptive policies, to the economic burdens faced by many Americans. I’ve chosen to apply this title to the prospect that America’s sponsors of defined benefit plans may not be offloading those pension liabilities with the rapidity that they’ve shown in the last decade or so.

There recently appeared an article in PlanSponsor titled, “Fewer Plan Sponsors Terminating DB Plans Amid Risk Management Shifts”. Again, one can only hope that this trend continues. “Half of plan sponsors do not intend to terminate their DB plans, up from 36.7% in 2023 and 28.3% in 2021, according to Mercer’s 2025 CFO Survey,” The survey was based on response from 173 senior finance officers. Unfortunately, it doesn’t undo the harm wrought by all the previous DB terminations, but it is still wonderful news for the American workforce!

As I’ve reported previously, Milliman’s monthly index of the Top 100 corporate plans currently shows a 104.1% funded ratio. Managing surplus assets is now the focus for many of these pension plans. Generating pension earnings, as opposed to living with the burden of pension expense will change one’s perspective. In Ron Ryan’s excellent book, titled, “The U.S. Pension Crisis”, he attributes a lot of the crisis to the accounting rules. For many corporations, pension expenses became a drag on earnings. Sure, they might have said that the company’s primary focus was manufacturing XYZ product and not managing a pension, but the costs associated with managing a DB plan certainly weighed heavily on the decision to freeze, terminate, and eventually transfer the plan.

Now that companies are sitting with a surplus leading to pension earnings, they are reluctant to shift those assets to an insurance company. According to the Mercer survey “70.1% reporting they have implemented dynamic de-risking strategies, an increase of nearly 10 percentage points from 2023. Additionally, 44% have boosted allocations to fixed-income assets to stabilize their funded status.” Let’s hope that they just haven’t engaged a duration strategy to mitigate some of the interest rate sensitivity. As we’ve stated, cash flow matching is a superior strategy to duration matching as every month of the coverage period is duration matched and you get the liquidity as a bonus to meet monthly distributions. Moreover, the Ryan ALM model will outyield ASC 715 discount rates which should enhance pension income or reduce pension expense.

Clearly, this is a positive trend, but we are far from out of the woods in preserving DB pensions. Unfortunately, plan sponsors are still considering risk transfers which continue to “dominate strategic discussions”, as more than 70% of organizations plan to offer lump-sum payments to some portion of their plan beneficiaries in the next two years.” The American workforce is far more interested these days in securing their golden years and a DB plan is the best way to accomplish that objective.

06.10.25
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HF Assets Hit Record – Why?

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

I touched on the subject of hedge funds a few years ago. Unfortunately, results haven’t gotten any better. Yet, P&I is reporting that Hedge Fund assets have reached an all-time high of $5.7 trillion. My simple question – WHY?

I believe that we have overcomplicated the management of DB pension plans and the use of hedge funds is a clear example. If the primary objective is to fund the promised benefits in a cost-efficient manner with prudent risk, why do we continue to waste so much energy buying complicated, opaque products and strategies that often come with ridiculously high fees and little alpha? Furthermore, the management of a DB pension plan has a relative objective – funding the plan’s liabilities of benefits and expenses. It is not an absolute objective which is what a hedge fund strives to produce. It really doesn’t matter if a hedge fund produces a 5% 10-year return if liability growth far exceeds that performance.

Here’s the skinny, the HFRI Composite index reveals that the 10- and 20-year compounded returns are 5.0% and 5.1%, respectively through March 31, 2025. We know that we didn’t get those “robust” returns at either an efficient cost or with prudent risk. What are these products hedging other than returns? Why do we continue to invest in this collection of overpriced and underperforming products? Are they sexy? Does that make them more appealing? Do we think that we are getting a magic elixir that will solve all of our funding issues?

Sadly, the story is even worse when you take a gander at the returns associated with the HFRI Hedge Fund of Funds Composite Index. I shouldn’t have been surprised by the weaker performance given the extra layer of fees. According to HFRI, 10- and 20-year annualized returns fall to 3.5% and 3.3%, respectively. UGH! For those two time frames, the S&P 500 produced returns of 12.5% and 10.2% respectively, and for a few basis points in fees. Furthermore, as U.S. interest rates have risen, bond returns have become competitive with the returns produced by HFs and HF of Funds. In fact, during the 1-year period both T-bills (4.9%) and the BB Aggregate index (5.2%) have outperformed HFs (4.6%), while matching or exceeding the HF of Funds (4.9%) as of March 31, 2025.

While pension systems struggle under growing contribution expenses and plan participants worry about the viability of the pension promise, the hedge fund gurus get to buy sports franchises because of the outrageous fees that are charged and the incredible sums of assets (again, $5.7 trillion!!!) that have been thrown at them? I suspect that the standard fee is no longer 2% plus 20%, but the fees probably haven’t fallen too far from those levels. As Fred Schwed asked with his famous publication in 1952 titled, “Where are the Customers’ Yachts?”, I haven’t been able to find them. Unfortunately, I think that the picture below is more representative of what plan sponsors and the participants have gotten for their investment.

Participant’s yacht – deflated results

Don’t you think that it is time to get back to pension basics? Let’s focus on funding the promised benefits through an enhanced liquidity strategy (cash flow matching) for a portion of the plan’s assets, while allowing the remainder of the portfolio’s assets to enjoy the benefit of time to grow unencumbered (extended investing horizon). This bifurcated approach is superior to the current strategy of placing all of your eggs (assets) into a ROA bucket and hoping that the combination will create a return commensurate with what is needed to meet those current Retired Lives Benefit promises and all future benefits and expenses.

06.09.25
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ARPA Update as of June 6, 2025

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

Pleased to provide you with another weekly update on the PBGC’s implementation of the critically important ARPA pension legislation. We are roughly 1 1/2 years from the completion of this program and yet, more pension funds are seeking to be added to the waitlist. In just the past week, another six funds were added to the list, including Bakery and Sales Drivers’ Local 33 Partitioned Pension Fund, Oregon Printing Industry Pension Trust, Local No. 171 Pension Plan, Licensed Tugmen’s and Pilots’ Pension Fund, San Diego Plasterers Pension Trust, and the Ironworkers Local No. 6 Pension Plan. In total 132 funds sought SFA that weren’t part of the original six priority groups that became five after further review.

There were no new applications submitted during the prior 7-day period, as the PBGC’s eFiling portal remains temporarily closed. There are currently 19 applications with the PBGC, including one Priority Group 1 member and a recently submitted Priority Group 2 application. There remains one application with a June 2025 deadline for action. Happy to report that two funds received approval for their applications, including New Bedford Longshoremen’s Pension Plan and Cement Masons Local No. 524 Pension Plan, both of which are non-priority group members. In total, they will receive just under $6 million in SFA plus interest for the 280 plan participants.

There were no plans asked to repay a portion of the SFA due to census errors and no plans had their applications denied. There were two plans running up against the PBGC’s 120-day window that withdrew applications, including Teamsters Local 277 Pension Fund and Laborers National Pension Fund.

Given uncertainty related to the impact of the tariffs on consumption, jobs, earnings, etc. The Federal Reserve remains cautious in its approach to future rate movements. As a result, U.S. interest rates have migrated higher providing plan sponsors with a wonderful opportunity to defease the promised benefit payments and in the process extend the potential coverage period. As always, we are willing to provide a free analysis to help any SFA recipient think through an appropriate asset allocation framework.

06.09.25
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Capital Distributions From Private Equity Collapse

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

I recently published a blog titled, Problem – Solution: Liquidity, in which I discussed the impact of pension plan sponsors cobbling together interest, dividends, and capital distributions from their roster of managers, and how that practice was not beneficial, especially during periods of stress in the markets. Well, one of those three legs of the “gotta, but how am I gonna, meet my monthly payment of benefits and expenses”, is really falling short at this time.

Dividends are far lower these days than they once were when equities were perceived to be quite risky. In fact, it wasn’t until 1958 that dividend income fell below interest income from bonds. Couple that phenomenon with the fact that capital distributions have plummeted, and plan sponsors are placing far greater emphasis on capturing interest from bonds than ever before. Yes, thankfully interest rates have risen, but the YTM on the BB Aggregate index is still only in the 4.7% range. That is not likely sufficient to meet monthly payouts, which means that bonds will have to be sold, too. The last thing one should want to do in a rising rate environment is to sell securities at a loss.

However, if the plan sponsor engaged a Cash Flow Matching (CFM) manager in lieu of an active core fixed income manager, the necessary liquidity would be made available each and every month of the assignment, as asset cash flows would be carefully matched against liability cash flows. Both interest and maturing principal would be used to meet those benefits and expenses. No forced selling. No scurrying around to “find” liquidity. A far more secure and certain process.

What if my plan isn’t fully funded. Does it make sense to use CFM? Of course, given that benefits and expenses are paid each month whether your plan is fully invested or not, wouldn’t it make more sense to have those flows covered with certainty? Sure, a poorly funded plan may only be able to use CFM for the next 3-5-years, but that’s the beauty of CFM. It is a dynamic process providing a unique solution for each pension plan. No off the shelf products.

06.02.25
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Problem – Solution: Liquidity

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

Plan Sponsors of defined benefit pension plans don’t have an easy job! The current focus on return/performance and the proliferation of new, and in some cases, complicated and opaque products, make navigating today’s market environment as challenging as it has ever been.

At Ryan ALM, Inc. we want to be our clients’ and prospects’ first call for anything related to de-risking/defeasing pension liabilities. Ryan ALM is a specialty firm focused exclusively on Asset/Liability Management (ALM) and how best to SECURE the pension promise. For those of you who know Ron Ryan and the team, you know that this have been his/our focus for 50+ years. I think that it is safe to say that we’ve learned a thing or two about managing pension liabilities along the way. Have a problem? We may just have the solution. For instance:

Problem – Plan sponsors need liquidity to meet monthly benefits and expense. How is this best achieved since many plan sponsors today cobble together monthly liquidity by taking dividends, interest, and capital distributions from their roster of investment advisors or worse, sell securities to meet the liquidity needs?

Solution – Create an asset allocation framework that has a dedicated liquidity bucket. Instead of having all of the plan’s assets focused on the return on asset (ROA) assumption, bifurcate the assets into two buckets – liquidity and growth. The liquidity bucket will consist of investment grade bonds whose cash flows of interest and principal will be matched against the liability cash flows of benefits and expenses through a sophisticated cost-optimization model. Liquidity will be available from the first month of the assignment as far out as the allocation to this bucket will secure – could be 5-years, 10-years, or longer. In reality, the allocation should be driven by the plan’s funded status. The better the funding, the more one can safely allocate to this strategy. Every plan needs liquidity, so even poorly funded plans should take this approach of having a dedicated liquidity bucket to meet monthly cash flows.

By adopting this framework, a plan sponsor no longer must worry where the liquidity is going to come from, especially for those plans that are in a negative cash flow situation. Also, removing dividend income from your equity managers has a long-term negative effect on the performance of your equity assets. Finally, during periods of market dislocation, a dedicated liquidity bucket will eliminate the need to transact in less than favorable markets further preserving assets.

We’re often asked what percentage of the plan’s assets should be dedicated to the liquidity bucket. As mentioned before, funded status plays an important role, but so does the sponsors ability to contribute, the current asset allocation, and the risk profile of the sponsor. We normally suggest converting the current core fixed income allocation, with all of the interest rate risk, to a cash flow matching (CFM) portfolio that will be used to fund liquidity as needed.

We’ll be producing a Problem – Solution blog on a variety of DB plan topics. Keep an eye out for the next one in the series. Also, if you have a problem, don’t hesitate to reach out to us. We might just have an answer. Don’t delay.

06.02.25
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ARPA Update as of May 30, 2025

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

Welcome to the last update for May 2025. It sure seems like the year is flying by. Are we having fun yet?

It has been nearly four years (July 2021) since the PBGC began implementing the ARPA pension legislation. Despite a few stumbles, I think that the program has been a huge success. Somewhat surprisingly, we are still seeing multiemployer pension plans being added to the waitlist as they seek a share of the Special Financial Assistance (SFA). In fact, an additional 5 funds were added to the waitlist in the last week.

In other news, there were no applications submitted to the PBGC for review, as their eFiling portal remains temporarily closed. There are currently 24 applications in the PBGC’s queue, with seven needing to be completed in some way by the end of June and another seven by the end of July. There was one application approved, as Sheet Metal Workers’ Local No. 40 Pension Plan received approval for an SFA grant of $9.9 million including interest for the plan’s nearly 1,000 participants.

There was one application withdrawn, as Retail Food Employers and United Food and Commercial Workers Local 711 Pension Plan withdrew a revised application seeking $64.2 million in SFA for the plans 25,306 participants. Perhaps the third submission will prove successful. Lastly, there were no applications denied nor asked to repay a portion of the SFA grant. As I’ve been reporting, we are likely very near the end of the census error issue repayments.

When the original Butch Lewis Act (BLA) was being legislated it was estimated that approximately 114 multiemployer plans would be eligible for a “loan”. There are currently 100 more funds seeking support. If I remember correctly, everything needs to wrap up regarding this legislation by December 31, 2026. Clearly, there is still a ton of work ahead for the PBGC.