Tag Archives: db-pensions

04.16.25
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P&I: “Not The Time To Panic” – Frost

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

There is hardly ever a good time to panic when managing a defined benefit pension plan. No one ever wants to be a forced seller because liquidity is needed and not available. Too often what looks like a well-diversified portfolio suddenly has all assets correlating to 1. I’ve seen that unfold many times during my nearly 44-years in the business.

It is critically important that the appropriate asset allocation framework be put in place long before one might be tempted to panic. As we’ve mentioned many times before, having all of your eggs (assets) in one basket focused on a return objective (ROA) is NOT the correct approach. Dividing assets among two buckets – liquidity and growth – is the correct approach. It ensures that you have the necessary liquidity to meet benefits and expenses as incurred, and it creates a bridge over uncertain markets by extending the investing horizon, as those growth assets are no longer needed to fund monthly payments.

Furthermore, the liquidity portfolio should be managed against the plans liabilities from the first month as far out as the allocation to the liquidity bucket will take you. Why manage against the liabilities? First, the only reason the plan exists is to meet a promise given to the participant. The primary objective managing a pension should be to SECURE the promised benefits at a reasonable cost and with prudent risk. Second, a cash bucket, laddered bond portfolio or generic core portfolio is very inefficient. You want to create a portfolio that defeases those promises with certainty. A traditional bond portfolio managed against a generic index is subject to tremendous interest rate risk, and there certainly seems to be a lot of that in the current investing environment.

The beauty of Cash Flow Matching (CFM) is the fact that bonds (investment grade corporate bonds in our case) are used to defease liabilities for each and every month of the assignment (5-, 10-, 20- or more years). Liabilities are future values (FV) and as such, are not interest rate sensitive. A $1,000 benefit payment next month or any month thereafter is $1,000 whether rates are at 2% or 10%. If one had this structure in place before the market turbulence created by the tariff confusion, one could sleep very comfortably knowing that liquidity was available when needed (no forced selling) and a bridge over trouble waters had been built providing ample time for markets to recover, which they will.

Yes, now is not the time to panic, but continuing to ride the rollercoaster of performance created by a very inefficient asset allocation structure is not the answer either. Rethink your current asset allocation framework. Allow your current funded status to dictate the allocation to liquidity and growth. The better funded your plan, the less risk you should be taking. DB pension plans need to be protected and preserved. Creating an environment in which only volatility is assured makes little sense. It is time to bring an element of certainty to the management of pensions.

04.11.25
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Milliman – Corporate Pension Funding Falls in March

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

Milliman has just released its monthly Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Weak investment returns, estimated at -1.4%, drove the PFI asset level down by $25 billion during March. Current assets for the top 100 plans are now $1.3 trillion. The fall in assets was only partially offset by the rise in the discount rate (13 bps) during the month. As a result, the surplus fell by $7 billion to $51 billion as of March 31, 2025.

The discount rate ended the month at 5.49%, which reduced plan liabilities by $18 billion, to $1.25 trillion by the end of March. As a result of assets falling by more than liabilities, the PFI funded ratio dropped from 104.6% at the end of February to 104.1% at the end of March. For the quarter, discount rates fell 10 basis points and the Milliman 100 plans lost $8 billion in funded status.   

“While the slight rise in discount rates in March led to a monthly decline in plan liabilities, plan assets fell even further due to poor market performance, which caused the funded status to fall below the 104.8% level seen at the beginning of 2025,” said Zorast Wadia, author of the PFI. Given market action during the first 10 days of April, it will be interesting to see if the impact from rising rates can offset the dramatic fall in asset values. Inflation fears fueled by tariffs could lead to rising bond yields, which will help mitigate some of the risk to equities given the possibility of declining earnings. As Zorast mentioned in the Milliman release, “plan sponsors will want to consider asset-liability matching strategies to preserve their balance sheet gains from last year”, especially given that 30-year corporates are once again yielding close to 6%.

04.04.25
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Pension Asset Allocation

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

David Gates, of Bread fame, penned “If” in 1971. One of the more famous lyrics in the song is “if a picture paints a thousand words”. If the average picture paints 1,000 words, the image below paints about 1 million. I believe that the image of a rollercoaster is the perfect metaphor for traditional asset allocation strategies that have pension funds riding markets up and down and up and down until the plan fails. Failure in my opinion is measured by rising contribution expenses, the adoption of multiple tiers requiring employees to contribute more, work longer, and get less, and worse, the migration of new workers to defined contribution offerings, which are an unmitigated disaster for the average American worker.

As you know, Pension America rode markets up in the ’80s (following a very challenging ’70s) and ’90s, only to have the ’00s drive funded ratios into the ground. The ’10s were very good following the Great Financial Crisis. The ’20s have been a mix of both good (’23 and ’24) and bad markets (’20 and ’22). Who knows where the next 5-years will take us. What I do know is that continuing to ride markets up and down is not working for the average public pension plan. The YTD performance for US equities (S&P 500 -13.2% as of 2:30 pm) coupled with a collapse in the Treasury yield curve is damaging pension funded ratios which had shown nice improvement.

Riding these markets up and down without trying to install a strategy to mitigate that undesirable path is imprudent. Subjecting the assets to the whims of the market in pursuit of some return target is silly. By installing a discipline (CFM) that secures the promised benefits, supplies the necessary liquidity, buys time for the growth assets, while stabilizing the funded status and contribution expenses seems to be a no-brainer. Yet, plan sponsors have been reluctant to change. Why?

What is the basis for the reluctance to adopt a modified asset allocation framework that has assets divided into two buckets – liquidity and growth? Do you enjoy the uncertainty of what markets will provide in terms of return? Do you believe that using CFM for a portion of the asset base reduces one’s responsibility? Do you not believe that the primary objective in managing a pension is to secure the promised benefits at a reasonable cost and with prudent risk? The only reason that the DB plan exists is to meet an obligation that has been promised to the plan participant. Like an insurance company or lottery system, why wouldn’t you want to create an investment program that has very little uncertainty?

04.03.25
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An Ugly Day For Pension America

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

Yes, today’s ugliness in the markets is only one day and how many times have we heard or read that you can’t market time or if you miss just the best performing 25-, 50-, or 100-days in the stock market, your return will resemble that of cash or bonds? Those facts are mostly correct. We may not be able to market time, but we can certainly put in place an asset allocation framework that gets DB pension plans off the rollercoaster of performance. We can construct an asset allocation that provides the necessary liquidity when markets may not be able to naturally. An asset allocation that buys time for the growth asset to wade through troubled markets. A framework that secures the promised benefits and stabilizes both funded ratios and contribution expenses for that portion of the fund that has adopted a new strategy.

Yes, today is only one day, but the impact can be significantly negative. See, it isn’t just the loss that has to be made up, as pension plans are counting on a roughly 7% return (ROA) for the year. Every negative event pushes that target further away. Equity values are getting whacked and today’s market activity is just exacerbating the already weak start to the year. While equity markets are falling, U.S. interest rates are down precipitously. The U.S. 10-year Treasury note’s yield is down just about 0.8% since early in January. As a reminder, the average duration of a DB pension is about 12 years or twice the duration of the Bloomberg Barclays Aggregate Index, which is the benchmark for most core fixed income mandates. So, your bond portfolios may be seeing some appreciation today and since the start of 2025, but those portfolios are not growing nearly as fast as your plan’s liabilities, which have grown by about 10.6% (12 year duration x 0.8% + income of 1.0% = 10.6%). As a result, funded ratios are taking a hit.

I wrote this piece back on March 4th reminding everyone that the uncertainty around tariffs and other factors should inspire a course change, an asset allocation rethink. I suspect that it didn’t. So, one can just assume that markets will come back and the underperformance will not have impacted the pension plan, but that just isn’t true. In many cases, equity market corrections take years to recover from and in the process contribution expenses rise, and in some cases dramatically so.

Adopting a new asset allocation framework doesn’t mean changing the entire portfolio. A restructuring can be as simple as converting your highly interest rate sensitive core bond portfolio into a cash flow matching (CFM) portfolio that secures the promised benefits from next month out as far as the allocation can go. In the process you will have improved the plan’s liquidity, extended the investing horizon for the alpha assets, stabilized the funded status for that segment of your plan, and mitigated interest rate risk, as those benefit payments are future values which aren’t interest rate sensitive. You’ll sleep very well once adopted.

03.19.25
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That Door’s Closed. What’s behind Door #2?

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

I’ve mentioned often through posts on this blog that we as an industry tend to overwhelm good ideas by allocating ridiculous sums of money in the pursuit of the next great idea. Sure, the idea was terrific several years ago, but today…? We are currently witnessing the negative impact of such an occurrence in private equity. According to many recent reports, the ability to generate liquidity from PE funds is proving to be as challenging as it has ever been. There are only two ways to liquidate holdings in a private fund: 1) a private transaction with a company or another PE fund, and 2) an initial public offering (IPO).

It appears that neither option is readily available to the private equity advisor at this time. Public markets seem to have lost their luster, as there are more than 1,000 fewer companies today than just 10-years ago. Current valuations are also acting as an impediment to going public with portfolio companies. Couple this with the fact that the lack of transactions is limiting the liquidity available to engage in private transactions among PE firms.

Given this situation, one would think that perhaps PE firms and their investors would reduce the demand for product and allow for the natural digestion of the “excess” capital. But no, that does not seem to be the case. According to an article by Claire Ruckin (Bloomberg), private equity firms are “turning to cash-rich credit investors for money to pay dividends to themselves and their backers.” Furthermore, a few are “getting back as much as they first invested, if not more, in effect leaving them with little or no equity in some of their biggest companies.” So much for being equity funds!

According to Claire’s article, more than 20 businesses in the US and Europe have borrowed to make payouts to their owners, according to Bloomberg-compiled data. Ironically, these “dividend recap” deals are a boon to lenders (private creditors) who have lots of cash to deploy. Could this be indicative of another product area overwhelmed by pension cash flows? Private equity firms are happy to take those resources off the creditors hands to return capital to their investors, but is the stacking of additional debt on these companies a good strategy? What happens if the current administrations policies don’t result in growth and worse, lead us into recession? Will these deals prove to be a house of cards?

As we’ve mentioned just shy of 1 million times now, a pension plan’s primary objective should be to SECURE the promised benefits at a reasonable cost and with prudent risk. Do you think that allowing private equity firms, which are already expense investment vehicles, to stack additional debt on top of their equity investments is either a reasonable cost or fiduciarily prudent? Come on! What are we trying to do here?

Defined benefit plans are critically important for the American worker. Continuing to place bets on the success of a PE firm to identify “attractive” equity investments in an environment as challenging as this one and then allowing them to “double down” by adding layers of debt just to pretend that capital is being returned to the investor is just wrong. Let’s get back to pension basics when we used the plan’s specific liabilities to drive asset allocation decisions that centered around securing the promised benefits. You want to gamble – go to Atlantic City. DB pensions plans aren’t the place.

03.12.25
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Lessons Learned?

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

My wife and I are rewatching The West Wing, and we are often amazed (disappointed) by how many of the social issues discussed 20 years ago when the show first aired that are still being debated today. It really just seems like we go around in circles. Well, unfortunately, the same can be said about pensions and supposed pension reforms. We need to reflect on what lessons were learned following the Great Financial Crisis of 2007-2009, when pension America saw its funded status plummet and contribution expense dramatically escalate. Have we made positive strides?

Unfortunately, with regard to the private sector, we continued to witness an incredible exodus from defined benefit plans and the continued greater reliance on defined contribution plans, which is proving to be a failed model. That activity appears to have benefited corporate America, but how did that action work for plan participants, who are now forced to fund, manage, and then disburse a “retirement” benefit through their own actions, which is asking a lot from untrained individuals, who in many cases don’t have the discretionary income to fund these programs in the first place.

With regard to public pension systems, we saw a lot of “action”. There were steps to reduce the return on asset assumption (ROA) for many systems – fine. But, that forced contributions to rise rapidly, creating a greater burden on state and municipal budgets that resulted in the siphoning off of precious financial resources needed to fund other social issues. In addition, there was great activity in creating additional benefit “tiers” (tears?), in which newer plan participants, and some existing members, were asked to fund more of their benefit through new or greater employee contributions, longer tenures before retirement, and more modest benefits to be paid out at retirement. Again, I would argue are not pension lessons learned, but are in fact benefit cuts for plan participants.

Fortunately, for multiemployer plans, ARPA pension legislation has gone a long way to securing the funded status and benefits for 110 plans that were once labeled as Critical or worse, Critical and Declining. There are another 90 pension plans or so to go through the application process in the hopes of securing special financial assistance. But have we seen true pension reform within these funds and the balance of plans that had not fallen into critical status?

It seems to me that most of the “lessons learned” have nothing to do with how DB pension plans are managed, but rather asks that plan participants bear the consequences of a failed pension model. A model that has focused on the ROA as if it were the Holy Grail. Pension plans should have been focused on the promise (benefit) that was made to their participants, and not on how much return they could generate. The focusing on a return target has certainly created a lot more uncertainty and volatility. As we’ve been reporting, equity and equity-like exposure within multiemployer and public pension systems was greater coming into 2025 then the levels that they were in 2007. What lesson was learned?

Pension America is once again suffering under the weight of declining asset values and falling interest rates. When will we truly learn that continuing to manage DB plans with a focus on return is NOT correct? The primary objective needs to be the securing of the promised benefits at a reasonable cost and with prudent risk. Shifting wads of money into private equity or private credit and thinking that you’ve diversified away equity exposure is just silly. I don’t know what the new administration’s policies will do for growth, inflation, interest rates, etc. I do know that they are currently creating a lot of angst among the investment community. Bring some certainty to the management of pensions through a focus on the promise is superior to continuing to ride the rollercoaster of performance.

02.18.25
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Terrific Issue Brief from the American Academy of Actuaries

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

An acquaintance of mine shared an issue brief that was produced by the American Academy of Actuaries last April. They Academy describe their organization and role, as follows. “The American Academy of Actuaries is a 20,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.”

The brief addressed surplus management for public pension systems. What does it mean and what should be done when a plan is in “surplus”. It is important to understand that a surplus calculation (plan assets – plan liabilities) is a single point in time. Our capital markets (assets) and U.S. interest rates (discounting of liabilities) are constantly changing. A plan that is deemed to be in surplus today could easily fall below 100% the very next day.

The go go decade of the 1990s witnessed public pension’s producing fairly consistent double-digit returns. Instead of locking in these gains through sound surplus management, benefits were often enhanced, contributions trimmed, or both. As a result, once the decade of the ’00s hit and we suffered through two major recessions, the enhancements to the benefits which were contractually protected and the lowered contributions proved tough to reverse.

According to Milliman, they estimate the average public funded ratio at 81.2% (top 100 plans) as of November 30, 2024. This is up substantially from September 30, 2022 when the average funded ratio was roughly 69.8%. But it highlights how much work is still needed to be done. I agree that it is wise to have a surplus management plan should these critically important funds once again achieve a “surplus”. I would hope that the plan is centered on de-risking their traditional asset allocations by using more bonds in a cash flow matching (CFM) strategy to reduce the big swings in funding. Furthermore, it is critically important to secure what has already been promised than to weaken the funded status by enhancing benefits or cutting contributions prematurely.

I’d recommend to everyone involved in pension management that they spend a little time with this report. The demise of DB pension plans in the private sector has created a very uncertain retirement for many of our private sector workforce. Let’s not engage in practices that lead to the collapse of public sector DB plans.

02.06.25
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Interesting Insights From Ortec Finance

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

PensionAge’s, Paige Perrin, has produced an article that referenced recent research from Ortec Finance. The research, which surveyed senior pension fund executives in the UK, US, the Netherlands, Canada, and the Nordics, found that 77% believe that risk will be elevated, either dramatically or slightly, in 2025. That’s quite the stat. It also follows on reporting from P&I that referenced heightened uncertainty by U.S. plan sponsors. As regular readers of this blog know, I’ve been suggesting to (pleading with) sponsors that they don’t need to live with uncertainty, which is truly uncomfortable.

Among several risks cited were interest rates, inflation, and market volatility. I can’t say that I blame them for their concerns. Who among us are able to adequately forecast rates and inflation? Seems like most fixed income professionals and bond market participants have been forecasting an aggressive move down in rates. Some of these prognosticators were forecasting as many as 7 rate reductions in 2024 and several others in 2025. We didn’t get 2024’s tally. Who knows about 2025 given that inflation has remained fairly sticky.

There is an easy fix for those of you who are concerned about interest rates and inflation. Adopt a cash flow matching (CFM) strategy that will carefully match asset cash flows of interest and principal with liability cash flows (benefits and expenses). Because benefit payments are future values (FVs), they are not interest rate sensitive. Problem solved! Furthermore, the use of CFM extends the investing horizon for the remainder of the fund’s growth assets, so they now have the appropriate time to grow to meet future liabilities.

One other startling stat caught my attention, as “77 per cent of senior pension fund executives believe the increasing number of retirees relative to the number of new hires in defined benefit (DB) plans pose a “significant” or “slight” risk to the DB pensions industry.” That concern is misplaced. I just wrote a post earlier this week on that subject. DB Pension plans are not Ponzi Schemes. They don’t need more depositors than those receiving payments. It is truly frightening that a significant percentage of our senior plan sponsors don’t understand how these plans are actuarial determined and subsequently funded.

Lastly, I nearly jumped out of my chair with excitement when I read the following quotes from Marnix Engels, Ortec Finance’s managing director for global pension risk, who stated the following:

“We believe assessing the risks of both (the bolding is my emphasis) assets and liabilities in combination is crucial to get the full picture on the health of a pension fund,” he said.

“If the impacts of risk drivers are only understood for one side of the funding health equation, then it is possible to misrepresent the overall effect.”

“If a fund is not assessing both assets and liabilities, then it is difficult to conclude the overall impact of interest rate hikes on the plan’s funding ratio.”

YES!!

02.04.25
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DB Pensions Are NOT Ponzi Schemes!

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

I recently stumbled onto an article that was highlighting the impending pension crisis (disaster) that is unfolding in Florida. The author’s primary reason for concern is the fact that there are now more beneficiaries collecting (659,333) than workers paying in (459,428). Briefly mentioned was the fact that the pension system currently has a funded ratio of 83.7% up from 82.4% last year. The fact that there are more recipients than those paying into the system is irrelevant. DB pension systems are not Ponzi Schemes, which in nothing more than a fraudulent vehicle that relies on a continuous influx of new “investors” (substitute plan participants) to pay the existing members of the pool.

A DB pension’s promises (benefit payments) are calculated by actuaries who have an incredibly challenging job of forecasting each individual’s career path (tenure), salary growth, longevity, etc. They do a great job, but they’ll be the first to tell you that they don’t get the individual participant calculations correct, but they do an amazing job of getting the total universe of payments nearly spot on. An acquaintance of mine, who happens to be an excellent actuary shared the following, “pension plans are funded over an active member’s career so that there will be sufficient funds to pay retirement benefits for life.  The funding rules in Florida require contributions to get the plan 100% funded over time.”

Granted, there are states that have not made the annual required contribution, in some cases for decades, and those plans are suffering (poorly funded) as a result. That isn’t the actuary’s issue, but they are left to try to make up the difference by forecasting the need for greater contributions and more significant returns. The payment of contributions comes with little uncertainty, while the reliance on greater investment performance comes with a huge amount of uncertainty over short time frames. I wouldn’t want my pension fund or livelihood (Executive Director, CIO, etc.) dependent on the capital markets.

I frequently hear the concern expressed about negative cash flow plans (i.e. contributions do not fully fund benefits). Why? If pension systems are truly designed based on each participant’s forecasted benefit, mature plans are bound to eventually fall into negative cash flow situations. These plans are designed to pay the last plan participant the last $1 of assets. These pension systems aren’t designed to be an inheritance for some small collection of beneficiaries who make it to the finish line. Importantly, there should be different investment strategies used for plans that are collecting more than they are paying out versus those in negative cash flow situation.

DB pensions are critically important retirement vehicles that need to be protected and preserved. Fabricating a crisis based on an incorrect observation is not helpful. If plan sponsors contribute the necessary amount each year and manage the assets prudently, these pension systems should be perpetual. Neglect the basics and all bets are off!

01.14.25
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Hey, Pension Community – We Have Liftoff!

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

Not since October of 2023 have we seen long-dated Treasury yields at these levels. Currently, the 30-year Treasury bond yield is 5% (12:47 pm EST) and the 10-year Treasury Note’s yield has eclipsed 4.8%. Despite tight credit spreads, long-dated (25+ years) IG corporate bond yields are above 6% today (chart in the lower right corner).

Securing pension liabilities, whether your DB plan is private, public, or a multiemployer plan, should be the primary objective. All the better if that securing (defeasement strategy) can be accomplished at a reasonable cost and with prudent risk. The good news: the current rate environment is providing plan sponsors with a wonderful opportunity to accomplish all of those goals, whether you engage in a cash flow matching (CFM) for a relatively short period (5-years), intermediate, (10ish-years) or longer-term (15- or more years) your portfolio of IG corporate bonds will produce a YTM of > 5.5%. This represents a significant percentage of the target ROA.

Furthermore, as we’ve explained, pension liabilities are future values (FVs), and FVs are not interest rate sensitive. Your portfolio will lock in the cost savings on day one, and barring any defaults (about 2/1,000 in IG bonds), the YTM is what your portfolio will earn throughout the relationship. That is exciting given the fact that traditional fixed income core mandates bleed performance during rising rate regimes. In fact, the IG index is already off 1.2% YTD (<10 trading days).

Who knows when the high equity valuations will finally lead to a repricing. Furthermore, who knows if US inflation will continue to be sticky, the Fed will raise or lower rates, geopolitical risks will escalate, and on and on. With CFM one doesn’t need a crystal ball. You can SECURE the promised benefits for a portion of your portfolio and in the process you’d be stabilizing the funded status and contribution expenses associated with those assets. Don’t let this incredibly attractive rate environment come and go without doing anything. We saw inertia keep plans from issuing POBs when rates were historically low. It is time to act.