Tag Archives: cost-savings

11.05.26
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What Do You Mean By Cost Savings?

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

The title for this post came from a question that I got in reply to my recent post related to my election platform. I highlighted the following benefits of cash flow matching (CFM):

  • Secure the promised benefits at low cost and with prudent risk,
  • Dramatically improve the monthly liquidity to meet those promised benefits (and expenses) chronologically,
  • Extend the investing horizon for the alpha assets,
  • Eliminate interest rate risk for the CFM assets, as they are defeasing benefits that are future values,
  • Keep the plan from forcing liquidity when selling assets to meet benefits is not advantageous,
  • Significantly reduce the cost of those future promises effective on the day the portfolio is constructed, and
  • Provide all of this at modest cost

As you can read, I used the word cost three times in my list of benefits, and they do actually mean two different things for me. When I mentioned that CFM can secure the promised benefits at low cost and with prudent risk, what we believe is the primary objective in managing a DB pension plan, I was referring to asset management fees. When I used cost in the seventh point on my list, I was also referring to the cost to manage the mandate. Unfortunately, our pension community has created a much more expensive investment management structure through the migration of significant assets to alternative products. Ryan ALM’s CFM strategy is priced at a level that supports our belief that pension management should be focused on securing benefits at low cost. Please reach out to us for our published fee schedule.

Further down the benefits list (point 6), I mentioned significantly reducing the cost of those future promises. In this case, I am speaking to the difference between the future value (FV) of benefits and the present value (PV) assets needed to fund those benefits. We are producing significant cost reduction in this higher interest rate environment. Now, finance students will say that this “cost reduction” is nothing more than the time value of money, and they wouldn’t be wrong. However, on the day that we construct a CFM portfolio we achieve that cost savings due to the benefits of investing in bonds. Someone striving for a 6.5% annual return (the plan’s ROA) over some period of time might be able to accomplish the same “savings” through a diversified asset allocation framework, but that annual pursuit of the 6.5% comes with great volatility and uncertainty. The sequencing of those annual returns can also create havoc in the pursuit of that objective.

So, I did use cost interchangeably. In one case, I wanted to highlight the low fees that we charge to manage a CFM mandate. In the other, it was the difference between the PV of assets and the FV of benefits being secured with certainty absent any defaults, which in the investment-grade universe occurs at <2/1,000 bonds annually (S&P study of the last 40-years).

We’d appreciate the opportunity to manage a slice of your pension plan’s assets so that you too can benefit from our ability to significantly reduce cost, whether I’m speaking about fees or future benefit payments. Keep the questions coming – thank you!

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.