Tag Archives: db-pensions

08.22.25
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Confusing the Purpose!

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

There recently appeared in my inbox an article from an investment advisory firm discussing Cash Flow Driven Investing (CDI). Given that CDI, or as we call it Cash Flow Matching (CFM), is our only investment strategy, I absorb as much info from “competitors” as I can.

The initial point in the article’s summary read “There is no one-size-fits-all approach for cashflow driven investment strategies.” We concur, as each client’s liabilities are unique to them. Like snowflakes, there are no two pension plan liability streams that are the same. As such, each CDI/CFM portfolio needs to reflect those unique cash flows.

The second point in their summary of key points is where we would depart in our approach. They stated: “While most will have a core allocation to investment grade credit, the broader design can vary greatly to reflect individual requirements.” This is where I believe that the purpose in using CFM is confused and unnecessarily complicated. CFM should be used to defease a plan’s net outflows with certainty. At Ryan ALM, Inc. we use 100% of the bond assets to accurately match the liability cash flows most often through the use of investment-grade corporate bonds. Furthermore, It is a strategy that will reduce risk, while stabilizing the plan’s funded status and contribution expenses associated with the portion of the liability cash flows that is defeased. It is not an alpha generator, although the use of corporate bonds will provide an excess yield relative to Treasuries and STRIPS, providing some alpha.

As we’ve discussed many times in this blog, traditional asset allocation approaches having all of the plan’s assets focused on a return objective is inappropriate for the pension objective to secure and fully fund benefits in a cost-efficient manner despite overwhelming use. We continue to espouse the bifurcation of the assets into liquidity and growth buckets. The liquidity bucket should be an investment-grade corporate bond portfolio that cash flow matches the liability cash flows chronologically from the next month as far out as the allocation will cover. The remaining assets are the growth or alpha assets that now have time to grow unencumbered.

Why take risk in the CFM portfolio by adding emerging markets debt, high yield, and especially illiquid assets, when the purpose of the portfolio is to create certainty and liquidity to meet ongoing benefits and expenses? If the use of those other assets is deemed appropriate, include them in the alpha bucket. As a reminder, CFM has been used successfully for many decades. Plan sponsors live with great uncertainty every day, as markets are constantly moving. Why not embrace a strategy that gives you a level of certainty not available in other strategies? Use riskier strategies when they have time to wade through potentially choppy markets. CFM provides such a bridge. If you give most investment strategies a 10-year time horizon without the need to provide liquidity, you dramatically enhance the probability of achieving the desired or expected outcome.

Unfortunately, we have a tendency in our industry to over-complicate the management of pensions. Using a CFM strategy focused on the plan’s liabilities, and not the ROA, brings the management of pensions back to its roots. Take risks when you have the necessary time. Focusing the assets on the ROA creates a situation in which one or more assets may have to be traded (sold) in order to meet the required outflows. Those trades might have to be done in environments in which natural liquidity does not exist.

08.18.25
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ARPA Update as of August 15, 2025

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

Hard to believe that we are nearly 2/3rds of the way through 2025. I suspect that the PBGC is having a hard time with that reality given the workload that remains with 119 multiemployer plans still seeking a successful review of their SFA application. Seventy-one applications have yet to be submitted through the PBGC’s e-Filing portal.

As for last week, there were no applications approved and none have been since July 29, when Laborers’ Local No. 130 Pension Fund received $33.3 million in SFA to support its 641 plan participants. However, there were 3 applications submitted for review. These applications were from none-priority group members submitting revised applications. There are currently 30 applications before the PBGC, which has 120-days to act on each or they are automatically approved.

I’m pleased to report that no applications were denied or withdrawn during the previous week. There were also no pension funds required to repay a portion of the SFA deemed excessive due to census errors. It has been since August 1, 2025, that we’ve had a fund repay a portion of the SFA. There was one new fund added to the waitlist, which now stands at 162 members. Chicago Foundry Workers Pension Plan added its name to the list on August 11th. As reported above, there are still 71 multiemployer plans that have not submitted applications at this time.

As you may recall, when the Butch Lewis Act was first contemplated, the folks at Cheiron initially defined the potential universe of SFA recipients as 114 funds. Today there are 249 funds seeking SFA support, of which 130 have already been approved. As a reminder, eligible plans must apply for SFA by December 31, 2025. Those filing revised applications have until December 31, 2026. Any distribution of SFA must be completed by September 30, 2030, due to legislative sunset rules.

The PBGC is averaging about 6-7 submissions per month. Based on that pace, it doesn’t seem possible that many of the 71 members on the waitlist that haven’t submitted applications will be able to meet that 2025 deadline. More to come.

08.14.25
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Are Investors About to Get Their Comeuppance?

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

As we’ve discussed in this blog on many occasions, the U.S. interest rate decline from 1982 to 2022 fueled risk assets well beyond their fundamentals. During the rate decline, investors became accustomed to the US Federal Reserve stepping in when markets and the economy looked dicey. There seems to be a massive expectation that the “Fed” will once again support those same risk assets by initiating another rally through a rate decline perhaps as soon as September. Is that action justified? I think not!

Recent inflation data, including today’s PPI that came in at 0.9% vs. 0.2% expected, should give pause to the crowd screaming for lower rates. Yes, employment #s published last week were very weak, and they got weaker when Erika McEntarfer, the commissioner of the Bureau of Labor Statistics, was fired after releasing a jobs report that angered President Donald Trump. In addition, we have Secretary of the Treasury, Scott Bessent, demanding rates be cut by as much as 150-175 bps, claiming that all forecasting “models” suggest the same direction for rates. Is that true? Again, I think not.

You may recall that I published a blog post on July 10, 2025 titled “Taylor-Made”, in which I wrote that the Taylor Rule is an economic formula that provides guidance on how central banks, such as the Federal Reserve, should set interest rates in response to changes in inflation and economic output. The rule is designed to help stabilize an economy by systematically adjusting the central bank’s key policy rate based on current economic conditions. It is designed to take the “guess work” out of establishing interest rate policy.

In John Authers (Bloomberg) blog post today, he shared the following chart:

Calling for a roughly 2.6% Fed Funds rate in an environment of 3% or more core and sticky inflation is not prudent, and it is not supported by history. Furthermore, the potential impact from tariffs will only begin to be felt as most went into effect as of August 1, 2025.

Getting back to the Taylor Rule, Authers also provided an updated graph suggesting that the Fed Funds rate should be higher today. In fact, it should be at a level about 100 bps above the current 4.3% and more than 270 bps above the level that Bessent desires.

Investors would be wise to exit the lower interest rate train before it fuels a significant increase in U.S. rates as inflation once again rises. The impact of higher rates will negatively impact all risk assets. Given that a Cash Flow Matching (CFM) strategy eliminates interest rate risk through the defeasement of benefits and expenses that are future values and thus not interest rate sensitive, one could bring an element of certainty to this very uncertain economic environment before investors get their comeuppance! Don’t wait for the greater inflation to appear, as it might just be too late at that point to get off the lower interest rate train before it plummets into a ravine.

08.12.25
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Corporate Pension Funding – UP!

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

I was out of the office last week, and as a result I am trying to play catch-up on some of the stories that I think you’d be interested in. Happy to report that Milliman released its monthly Milliman 100 Pension Funding Index (PFI), which, as you know, analyzes the 100 largest U.S. corporate pension plans. Importantly, the news continues to be good for corporate pension funding.

For July, a discount rate increase of 3 bps helped stabilize corporate pension funding, lowering the Milliman PFI projected benefit obligation (PBO) by $6 billion to $1.213 trillion as of July 31. Anticipated investment returns were marginally subpar at 0.38%. After taking into consideration a higher discount rate, marginal investment gains, and net outflows, overall corporate pension funding increased by $4 billion for the month.

The Milliman 100 PFI funded ratio now stands at 105.3% up from June’s 105.7%. For the last 12-months, the funded ratio has improved by 2.8%, as the collective funded status position improved by $32 billion. “July marks four straight months of funding improvement, with levels not seen since late 2007, before the global financial crisis,” said Zorast Wadia, author of the PFI. “In order to preserve funded status gains, plan sponsors should be thinking about asset-liability management strategies to help mitigate potential discount rate declines in the future.” We couldn’t agree more with you, Zorast!

As highlighted below, overall corporate pension funding has improved dramatically. A significant contributor to this improvement has been the rise in U.S. interest rates which significantly lowered the present value of those future benefits. Let’s hope that the current funding will encourage plan sponsors to maintain their DB pension plans for the foreseeable future. You have to love pension earnings as opposed to pension expense!

Figure 1: Milliman 100 Pension Funding Index — Pension surplus/deficit

View the complete Pension Funding Index.

08.04.25
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ARPA Update as of August 1, 2025

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

Talk about jumping out of the frying pan into the fire! I left New Jersey’s wonderful heat and humidity only to find myself in El Paso, TX, where the high temperature is testing the limits of a normal thermometer. Happy to be speaking at the TexPERS conference this week, but perhaps they can do an offsite in Bermuda the next time.

Regarding the ARPA legislation and the PBGC’s implementation of this critical pension program, we continue to see the PBGC ramp up its activity level. This past week witnessed five multiemployer plans submitting applications of which four were initial filings and the fifth was a revised offering. Another plan received approval, while one fund added its name to the waitlist. Finally, two funds have locked-in the measurement dates (valuation purposes).

Now the specifics: The four funds submitting initial applications were Colorado Cement Masons Pension Trust Fund, Iron Workers-Laborers Pension Plan of Cumberland, Maryland, Cumberland, Maryland Teamsters Construction and Miscellaneous Pension Plan, and Exhibition Employees Local 829 Pension Fund that collectively seek $50.8 million in SFA for their 1,260 plan participants. This week’s big fish, UFCW – Northern California Employers Joint Pension Plan, a Priority Group 6 member, is seeking $2.3 billion for its 138.5k members.

The plan receiving approval of its application for SFA is Laborers’ Local No. 130 Pension Fund, which will receive $33.3 million in SFA and interest for its 641 participants. In an interesting twist, Laborers’ Local No. 130 Pension Fund, has added the fund to a growing list of waitlist candidates. If the Laborers name seems to resemble the name of the recipient of the latest SFA grant you wouldn’t be wrong. I was as confused as you are/were until I realized that these entities have different that there are two different EIN #s.

Happy to report that there were no applications withdrawn, none denied, and no SFA recipients were asked to return a portion of the proceeds due to incorrect census information. However, there are still 119 funds going through the process. There is a tremendous amount of work left to be done at this time. This comes on the heels of 131 funds being approved for a total of $73.4 billion in SFA and interest supporting the retirements for 1.77 million American workers/retirees. What an incredible accomplishment!

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?

07.24.25
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A few Observations from Newport

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

As I mentioned in my ARPA update on Monday, I had the pleasure of attending the Opal Public Fund Forum East in beautiful Newport, RI, and neither the conference nor Newport disappointed. I don’t attend every session during the conference, but I do try to attend most. In all honesty, I can’t listen to another private equity discussion.

As always, there were terrific insights shared by the speakers/moderators, but there were also some points being made that are just wrong. With this being my first day back in the office this week, I don’t have the time to get into great detail regarding some of my concerns about what was shared, but I’ll give you the headline and perhaps link a previous blog post that addressed the issue.

First, DB pension plans are not Ponzi Schemes that need more new participants than retirees to keep those systems well-funded and functioning. Actuaries determine benefits and contributions based on each individual’s unique characteristics. If managed appropriately, systems with fewer new members can function just fine. Yes, plans that find themselves in a negative cash flow situation need to rethink the plan’s asset allocation, but they can continue to serve their participants just fine. Remember: a DB pension plan’s goal is to pay the last benefit payment with the last $. It is not designed to provide an inheritance.

Another topic that was mentioned several times was the U.S. deficit and the impending economic doom as a result. The impact of the U.S. deficit is widely misunderstood. I was fortunate to work with a brilliant individual at Invesco – Charles DuBois – who took the time to educate me on the subject. As a result of his teaching, I now understand that the U.S. has a potential demand problem. Not a debt issue. I wrote a blog post on this subject back in 2017. Please take the time to read anything from Bill Mitchell, Warren Mosler, Stephanie Kelton, and other disciples of MMT.

Lastly, the issue of flows into strategies/asset classes seems not to be understood. The only reason we have cycles in our markets is through the movement of assets into and out of various products/strategies. Too much money chasing too few good ideas creates an environment in which those flows can overwhelm future returns. It is the same for individual asset management firms. Many of the larger asset management firms have become sales organizations in lieu of investment management organizations as they long ago eclipsed the natural capacity of their strategies. In the process, they have arbitraged away their insights which may have provided the basis for some value-added in the past. I believe that too much money is chasing many of the alternative/private strategies. In the process, future returns and liquidity will be negatively impacted. We’ve already seen that within private equity. Is private debt next?

Again, always enjoy seeing friends and industry colleagues at this conference. I continue to learn from so many of the presenters even after 44-years in the industry. However, not everything that you hear will be correct. It is up to you to challenge a lot of the “common wisdom” being shared.

07.18.25
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AI Needs An Education Regarding ALM/CFM!

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

I asked an AI tool that I use the following: Asset/Liability Management (ALM) is an effective tool for pensions. What strategies are currently being deployed?

As usual, the response was nearly instantaneous, but was it correct? Here is what I got:

Overview

“Asset/liability management (ALM) remains central to pension fund sustainability, aiming to balance expected pension liabilities with optimal asset growth. In 2025, pension funds deploy a range of strategies to ensure their ability to meet long-term obligations while managing risk efficiently.” No argument there. However, here is a list of the strategies. This is where I have an issue.

Key ALM Strategies Currently in Use

1. Liability-Driven Investing (LDI)

  • Matching Asset Duration to Liabilities: Many corporate pension plans invest in high-quality bonds with durations closely matching those of plan liabilities to mitigate interest rate risk. This ensures that both assets and liabilities react similarly to interest rate changes, stabilizing the funded status from year to year.
  • Glidepath Strategies: Plans gradually shift the asset mix towards more fixed-income securities as funded status improves or as the plan matures, further reducing risk and aligning assets with near-term liabilities.

2. Dynamic Asset Allocation

  • Strategic Shifts in Asset Mix: Pension funds adjust allocations based on changing liabilities, market conditions, and funding status. For instance, U.S. public pension plans have recently shifted asset allocations to maintain return expectations and recover from volatility.
  • Scenario-Based Modeling: Funds use forward-looking models to stress-test outcomes under varying economic scenarios, reviewing assumptions about returns, inflation, and participant demographics.

3. Risk Transfer Solutions

  • Pension Risk Transfer (PRT): Many sponsors employ annuity purchases and lump-sum windows to reduce long-term liability, transferring obligations to insurers. In 2024, settlement payouts (such as annuity buyouts) remained a significant tool for risk management among major pension plans.

4. Liability Modeling Innovations

  • Member-Level Simulation: Advanced models project individual participant cash flows, account for currency exposure, and enable granular liability projections. Such approaches allow more precise matching of assets to future obligations, improving ALM decision-making.
  • Regular Reviews and Assumption Updates: ALM programs, such as those at CalPERS, involve systematic reviews of demographic and financial assumptions (e.g., life expectancy, inflation), with revisions made every four years to incorporate emerging trends.

5. Use of Custom Benchmarks

  • Liability-Mimicking Portfolios: Funds create tailored portfolios (“benchmark” portfolios) that track the liability profile as closely as possible, often blending nominal bonds, inflation-linked bonds, and equities according to the plan’s specifics (such as maturity and inflation sensitivity).

That’s it? Where is Cash Flow Matching (CFM)? In each of these scenarios, liquidity needed to fund benefits and expenses is missing. Duration strategies minimize interest rate risk, but don’t produce timely liquidity to fully fund B+E. Furthermore, duration strategies that use an “average” duration or a few key rates don’t duration match as well as CFM that duration matches EVERY month of the assignment.

In the second set of products – dynamic asset allocation – what is being secured? Forecasts related to future economic scenarios come with a lot of volatility. If anyone had a crystal ball to accomplish this objective with precision, they’d be minting $ billions!

A PRT or risk transfer solution is fine if you don’t want to sustain the plan for future workers, but it can be very expensive to implement depending on the insurance premium, current market conditions (interest rates), and the plan’s funded status

In the liability modeling category, I guess the first example might be a tip of the hat to cash flow matching, but there is no description of how one actually matches assets to those “granular” liability projections. As for part two, updating projections every four years seems like a LONG TIME. In a Ryan ALM CFM portfolio, we use a dynamic process that reconfigures the portfolio every time the actuary updates their liability projections, which are usually annually.

Lastly, the use of Custom benchmarks as described once again uses instruments that have significant volatility associated with them, especially the reference to equities. What is the price of Amazon going to be in 10-years? Given the fact that no one knows, how do you secure cash flow needs? You can’t! Moreover, inflation-linked bonds are not appropriate since the actuary includes an inflation assumption in their projections which is usually different than the CPI.  

Cash Flow Matching is the only ALM strategy that absolutely SECURES the promised benefits and expenses chronologically from the first month as far out as the allocation will go. It accomplishes this objective through maturing principal and interest income. No forced selling to meet those promises. Furthermore, CFM buys time for the residual assets to grow unencumbered. This is particularly important at this time given the plethora of assets that have been migrated to alternative and definitely less liquid instruments.

As mentioned earlier, CFM is a dynamic process that adapts to changes in the pension plan’s funded status. As the Funded ratio improves, allocate more assets from the growth bucket to the CFM portfolio. In the process, the funded status becomes less volatility and contribution expenses are more manageable.

I’m not sure why CFM isn’t the #1 strategy highlighted by this AI tool given its long and successful history in SECURING the benefits and expenses (B&E). Once known as dedication, CFM is the ONLY strategy that truly matches and fully funds asset cash flows (bonds) with liability cash flows (B&E). Again, it is the ONLY strategy that provides the necessary liquidity without having to sell assets to meet ongoing obligations. It doesn’t use instruments that are highly volatile to accomplish the objective. Given that investment-grade defaults are an extremely rare occurrence (2/1,000 bonds), CFM is the closest thing to a sure bet that you can find in our industry with proven performance since the 1970s.

So, if you are using an AI tool to provide you with some perspective on ALM strategies, know that CFM may not be highlighted, but it is by far the most important risk reducing tool in your ALM toolbox.

07.16.25
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Really Only One Significant Influence

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

Managing fixed income (bonds) can be challenging as there are a plethora of risks that must be evaluated including, but not limited to, credit, liquidity, maturity/duration, yield, prepayment and reinvestment risk, etc. within the investment-grade universe. But the greatest risk – uncertainty – remains interest rate risk. Who really knows the future direction of rates? As the graph below highlights, U.S. interest rates have moved in long-term secular trends with numerous reversals along the way. Does that mean that we are headed for a protracted period of rising rates similar to what was witnessed from 1953 to 1981 or is this a head fake along the path to historically low rates?

When rates are falling, it is very good for bonds as they not only capture the coupon, but they get some capital appreciation, too. However, when rates rise, it is a very different game. Yes, rising interest rates are very good for pension funds from a liability perspective, as the present value (PV) of those future benefit payments (I.e. liabilities) is reduced, but the asset side may be hurt and not only for bonds but other asset classes as well.

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This is the primary reason why bonds should be used for their cash flows of interest and principal and not as a performance generator. The cash flows should be used to meet monthly benefits and expenses chronologically through a cash flow matching strategy (CFM). Unfortunately, Bonds are frequently used for performance and perhaps diversification benefits while compared to a generic index, such as the BB Aggregate index, which doesn’t reflect the unique characteristics of the pension plan’s liabilities.

U.S. interest rates are presently elevated but aren’t high by historic standards. However, the current level of rates does provide the plan sponsor with a wonderful opportunity to take risk from their traditional asset allocation by defeasing a portion of the plan’s liabilities from next month out as far as the allocation will cover. While the bond portfolio is funding monthly obligations, the remaining assets can just grow unencumbered.

Given the uncertainty regarding the current inflationary environment, betting that U.S. rates will fall making a potential “investment” in bonds more lucrative is nothing short of a crapshoot. Investing in a CFM strategy helps to mitigate interest rate risk as future values are not interest rate sensitive.

07.10.25
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Taylor-Made?

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

The Federal Reserve meeting notes have been published, and there seems to be little appetite among the Fed Governors to reduce U.S. interest rates at the next meeting. They continue to believe that the recently inflated tariffs and current trade policy actions could lead to greater inflationary pressures. These notes do not support the current administration’s push to see the Fed Funds Rate dropped significantly – perhaps as much as 3%.

In a very informative Bloomberg post from this morning, John Authers reminded everyone that President Trump selected Jerome Powell over John Taylor, Stanford University, in 2017 to become Chairman of the Federal Reserve. I must admit that I didn’t remember that being the case, while also not recalling that it is John Taylor who is credited with developing the Taylor Rule in 1993. When I think of famous Taylors, John isn’t at the top of my list. I might have believed that it had something to do with Lawrence Taylor’s dominance on the football field where he “ruled” for 13 Hall of Fame seasons and is considered by many the greatest defensive player in NFL history (yes, I am a Giants’ fan).

So, what is the Taylor Rule? The Taylor Rule is an economic formula that provides guidance on how central banks, such as the Federal Reserve, should set interest rates in response to changes in inflation and economic output. The rule is designed to help stabilize an economy by systematically adjusting the central bank’s key policy rate based on current economic conditions. It is designed to take the “guess work” out of establishing interest rate policy.

The Taylor rule suggests that the central bank should raise interest rates when inflation is above its target (currently 2%) or when GDP is growing faster than its estimated potential (overheating). Conversely, it suggests lowering interest rates when inflation is below target or when GDP is below potential (economy is underperforming). Ironically, President Trump’s dissatisfaction with Jerome Powell’s reluctance to reduce rates given significant economic uncertainty, may have been magnified by John Taylor’s model, which would have had rates higher at this time as reflected in the graph below.

As a reminder, Ryan ALM, Inc. does not forecast interest rates as part of our cash flow matching (CFM) strategy. In fact, the use of CFM to defease pension liabilities (benefits and expenses (B&E)) eliminates interest rate risk once the portfolio is built since future values (B&E) aren’t interest rate sensitive. That said, the currently higher rate environment is great for pension plan sponsors who desire to bring an element of certainty to the management of pensions which tend to live in a very uncertain existence. By funding a CFM portfolio, plan sponsors can ensure that proper liquidity is available each month of the assignment, while providing the residual assets time to grow. There are many other benefits, as well.

Since we don’t know where rates are likely to go, we highly recommend engaging a CFM program sooner rather than later before we find that lower interest rates have caused the potential benefits (cost savings) provided by CFM to fall.