Tag Archives: db-pensions

12.19.24
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5.6% 10-year forecast for US All-Cap

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

Fiducient Advisors has published its 2025 Outlook. Given the strong performance in US equity markets, future returns have been adjusted downward – rightfully so. Here are some of the highlights:

–Full valuations, concentrated U.S. large-cap indexes and the risk of reigniting inflation are shaping the key themes we believe will drive markets and portfolio positioning in 2025.

-Recent market successes have pushed our 2025 10-year forecasts lower across most major asset classes. Long-term return premium for equities over fixed income is now at its narrowest since 2007, sparking important conversations about portfolio posture and risk allocation.

–Rising reinflation risk leads us to increase our allocation to more flexible fixed income strategies (dynamic bonds) and TIPS while eliminating our global bond allocation.

US stock market performance has been heavily influenced by the “Magnificent Seven”, creating concentration risk not seen in decades, if ever. The outperformance of US markets vis-a-vis international markets is unprecedented. As stated above, valuations are stretched. Most metrics used to measure “value” in our markets are at extreme levels, if not historical. How much more can one squeeze from this market? As a result, Fiducient is forecasting that US All-Cap (Russell 3000?) will appreciate an annualized 5.6% for the next 10-years.

Nearly as weak are the forecasts for private equity, which Fiducient believes will produce only an annualized 8.6% return through the next 10-years. What happened to the significant “premium” that investing privately would provide? Are the massive flows into these products finally catching up with this asset class? Sure seems like it.

With regard to the comment about fixed income, I’m not sure that I know what “flexible fixed income strategies” are and the reference to dynamic escapes me, too. I do know that bonds benefit from lower interest rates and get harmed when rates rise. We have been very consistent in our messaging that we don’t forecast interest rates as a firm, but we have also written extensively that the inflation fight was far from over and that US growth was more likely to surprise on the upside than reflect a recessionary environment. Today, the third and final installment of the Q3’24 GDP forecast was revised up to 3.1% annual growth. The Q4’24 estimate produced by the Atlanta Fed through its GDPNow model is forecasting 3.2% annual growth. What recession?

Given that US growth is likely to be stronger, employment and wage growth still robust, and sticky inflation just that, bonds SHOULDN’T be used as a performance instrument. Bonds should be used for their cash flows of interest and principal. BTW, one can buy an Athene Holding Ltd (ATH) bond maturing 1/15/34 with a YTW of 5.62% today. Why invest in US All-Caps with a projected 5.6% return with all of that annual standard deviation when you can buy a bond, barring a default and held to maturity, will absolutely provide you with a 5.62% return? This is the beauty in bonds! Those contractual cash flows can be used, and have been for decades, to defease liabilities (pension benefits, grants, etc.) and to SECURE the promises made to your participants.

It is time to rethink the approach to pension management and asset allocation. Use a cash flow matching strategy to secure your benefits for the next 10-years that buys time for the growth assets to GROW, as they are no longer a source of liquidity. Equity markets may not provide the same level of appreciation as they have during the last decade (+13.4% annualized for the S&P 500 for 10-years through 11/30/24), but a defeased bond portfolio will certainly provide you with the necessary liquidity, an extended investing horizon, and the security (peace of mind) of knowing that your benefits will be paid as promised and when due! Who needs “flexible and dynamic” bonds when you have the security of a defeased cash flow matching strategy?

12.16.24
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ARPA Update as of December 13, 2024

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

Welcome to the last full week before the Christmas season kicks off. Most investors will be sorry to see 2024 come and go. For the PBGC, 2024 has been a year of great accomplishments, with the approval of Special Financial Assistance (SFA) for 35 multiemployer plans covering 458,171 participants with SFA grants totaling $16.2 billion – wow!

The last week was a continuation of the PBGC’s activity with seven more funds submitting applications seeking $638.2 million for nearly 27k members. The applications included five new submissions and 2 revised applications. The applicants included the Dairy Industry-Union Pension Plan for Philadelphia and Vicinity, Bricklayers Pension Fund of West Virginia, United Wire, Metal and Machine Pension Plan, Distributors Association Warehousemen’s Pension Trust, Local 945 I.B. of T. Pension Plan, Alaska Teamster – Employer Pension Plan, and the Local 888 Pension Fund. Grant requests ranged from United Wire’s $228.5 million to the Bricklayers $1.96 million for their 170 participants.

In addition to the new submissions, there was one approval. Teamsters Local 11 Pension Plan will receive $29.3 million for the 2,012 members of its plan. This North Haledon, NJ fund submitted a revised application on August 29, 2024. In other ARPA news, there were no applications denied or withdrawn during the previous 7 days. In addition, there were no new plans added to the waitlist or forced to repay a portion of the SFA due to census errors.

US Treasury interest rates backed up fairly significantly last week as inflation data came in a little higher than recent trends giving bonds investors reason to challenge the narrative that the Fed would continue pushing down the Fed Funds rate. The higher rates are providing plan sponsors with greater cost savings on future benefits through cash flow matching strategies.

12.09.24
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ARPA Update as of December 6, 2024

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

You have to be excited as a Mets fan given yesterday’s news that Juan Soto will be joining the organization on a massive contract. The $765 million is a staggering figure. Let’s see what happens to ticket prices and TV streaming services from a cost standpoint.

Since ARPA was passed in 2021 and signed into law in March of that year, there have been folks upset that the government is using “tax revenue” to rescue pensions for multiemployer plans. Well, in the latest update provided by the PBGC, we note that the Pressroom Unions’ Pension Plan, a non-priority group member, will receive $63.7 million to protect and preserve the promised pensions for 1,344 plan participants. That seems very reasonable since this grant will likely cover these benefit payments for roughly the same time frame that Soto will be a Met (15 years), at only $12.7 million more than just one year of Soto’s contract.

In other ARPA news, the e-filing portal is listed as “limited”, which according to the PBGC means that “the e-Filing Portal 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.” PA Local 47 Bricklayers and Allied Craftsmen Pension Plan was the only plan to file an application (revised) last week. They are seeking $8.3 million in SFA for 296 members in the fund.

In other news, three funds, including Toledo Roofers Local No. 134 Pension Plan, Freight Drivers and Helpers Local Union No. 557 Pension Plan, and PACE Industry Union-Management Pension Plan, were asked to repay a total of $7 million in excess SFA due to census issues. The rebate represented 0.45% of the $1.6 billion received in SFA grants. Happy to report that there were no applications denied or withdrawn during the prior 7-day period.

As the chart above highlights, there are still 57 plans that have yet to file an application seeking SFA support. Estimates range from another $10 – $20 billion being allocated to the remaining entities.

12.06.24
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“Peace of Mind” – How Beneficial Would That Be?

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

As a member of the investment community do you often feel stressed, worried, insecure, uneasy, or are you just simply too busy to be at peace? In the chaotic world of pension management, finding peace of mind can sometimes be hard, if not impossible. How much would it mean to you if you could identify an investment strategy that provides you with just that state of being?

At Ryan ALM, Inc. our mission is to protect and preserve DB pension plans through a cash flow matching (CFM) strategy that ensures, barring any defaults, that the liabilities (benefits and expenses) that YOU choose to cover are absolutely secured chronologically. You’ll have the liquidity to meet those obligations in the amounts and at the time that they are to be used. There is no longer the worry and frustration about finding the necessary “cash” to meet those promises. CFM provides you with that liquidity and certainty of cash flows.

Furthermore, you are buying time for the growth (alpha or non-bond) assets to now grow unencumbered, as they are no longer a source of liquidity. You don’t have to worry about drawdowns, as the CFM portfolio creates a bridge over the challenging markets with no fear of locking in losses due to cash flow needs. Don’t you just feel yourself nodding off with the knowledge that there is a way to get a better night’s sleep?

How much would you “spend” to achieve such peace of mind? Most pension systems cobble together disparate asset classes and products, many which come with hefty price tags, in the HOPE of achieving the desired outcome. With CFM, YOU choose the coverage period to be defeased, which could be as short as 3-5 years or as long as it takes to cover the last liability. The longer the time horizon the greater the potential cost reduction. As an FYI, most of our clients have chosen a coverage period of roughly 10-years. Knowing that you have SECURED your plan’s obligations for the next 10-years, and locked in the cost reduction, which can be substantial (2% per year = 20% for 1-10 years), on the very first day in which the portfolio is constructed, has to be just an incredible feeling compared to living in an environment in which traditional pension asset allocations can have significant annual volatility and no certainty of providing either the desired return or cash flow when needed.

Remember, the amount of peace of mind is driven by your decisions. If you desire abundant restful nights, use CFM for longer timeframes. If you believe that you only need “peace of mind” in the near-term, engage a CFM strategy for a shorter 3-5 years. In any case, I guarantee that the pension plan’s exposure to CFM won’t be the reason why you are restless when you put your head on the pillow. Oh, and by the way, we offer the CFM strategy at fee rates that are substantially below traditional fixed income strategies, let alone, non-bond capabilities. Call us. We want to be your sleep doctor!

11.08.24
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Another Inconsistency

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

The US pension industry is so critically important for the financial future of so many American workers. The defined benefit coverage is clearly not what it once was when more than 40% of workers were covered by traditional pension. There were a number of factors that led to the significantly reduced role of DB plans as the primary retirement vehicle. At Ryan ALM we often point out inconsistencies and head-scratching activities that have contributed to this troubling trend. One of the principal issues has been the conflict in accounting rules between GASB (public plans) and FASB (private plans). We frequently highlight these inconsistencies in our quarterly Pension Monitor updates.

The most striking difference between these two organizations is in the accounting for pension liabilities. Private plans use a AA corporate yield curve to value future liabilities, while public plans use the return on asset assumption (ROA) as if assets and liabilities move in lockstep (same growth rate) with one another. As a reminder, liabilities are bond-like in nature and their present values move with interest rates. I mention this relationship once more given market action during October.

Milliman has once again produced the results for the Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest US corporate pension plans (thank goodness that there are still 100 to be found). During the month of October, investment returns produced a -2.53% result. Given similar asset allocations, it is likely that investment results will prove to be negative for public plans, too. We’ll get that update later in the month from Milliman, also. Despite the negative performance result for the PFI members, their collective Funded Ratio improved from 102.5% at the end of September to 103.4% by the end of October.

The improved funding had everything to do with the change in the value of the PFI’s collective liabilities, as US rates rose significantly creating a -0.35%  liability growth rate and a discount rate now at 5.31%. This was the first increase in the discount rate in six months according to Zorast Wadia, author of the PFI. The upward move in the discount rate created a -$51 billion reduction in the projected benefit obligation of the PFI members. That was more than enough to overcome the -$41 billion reduction in assets.

What do you think will happen in public fund land? Well, given weak markets, asset levels for Milliman’s public fund index will likely fall. Given that the discount rate for public pension systems is the ROA, there will be no change in the present value of public pension plans’ future benefit obligations (silly). As a result, instead of witnessing an improvement in the collective funded status of public pensions, we will witness a deterioration. The inconsistency is startling!

11.06.24
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Have You Ever Wondered?

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

Ever wonder why future pension contributions aren’t part of the funded ratio calculation, yet future benefit payments are? Ironically, under GASB 67/68, which requires an Asset Exhaustion Test (AET), which is a test of a pension plan’s solvency, future contributions are an instrumental part of the equation. Why the disconnect? 

Also, the fact that future contributions, which in many cases are mandated by legislation or through negotiations, are not in the funded ratio means that the average funded ratio is likely understated. Furthermore, given the fact that the funded ratio is likely understated, the asset allocation, which should reflect the funded status, is likely too aggressive placing the plan’s assets on a more uncertain path leading to bigger swings in the funded ratio/status of the plan as the capital markets do what they do.

As part of the Ryan ALM turnkey LDI solution, we provide an AET, which often highlights the fact that the annual target return on asset assumption (ROA) is too high. A more conservative ROA would likely lead to a much more conservative asset allocation resulting in far smaller swings and volatility associated with annual contributions and the plan’s funded status. As you will soon read, contributions are an important part of the AET for public pensions. When performing the test, you need to account for future contributions from both employees and employers. These contributions, along with investment returns, help to sustain the pension plan’s assets relative to liabilities over time.

Here’s a quick summary of how contributions fit into the asset exhaustion test:

  1. Current Assets: Start with the current market value of the plan’s assets.
  2. Benefit Payments: Forecast the actuarial projections for future benefit payments
  3. Administrative Expenses: Add in the actuarial projections for administrative expenses
  4. Future Contributions: Subtract the actuarial projections for future contributions from employees and employers to get a net liability cash flow.
  5. Investment Returns: Grow the current market value of plan’s assets at the expected investment return on the plan’s assets (ROA) plus a matrix of lower ROAs to create an annual asset cash flow
  6. Year-by-Year Projection: Perform a year-by-year projection to see if the asset cash flows will fully fund the net liability cash flows. Choose the lowest ROA that will fully fund net liability cash flows as the new target ROA for asset allocation

By including contributions in the test, you get a more accurate picture of the plan’s long-term sustainability. So, I ask again, why aren’t future contributions included in the Funded Ratio calculation? Isn’t it amazing how one factor (not including those contributions) can lead to so many issues? With less volatility in funded status and contributions, DB plans would likely have many more supporters among sponsors and the general public (aka taxpayer) . It is clearly time to rethink this issue.

10.30.24
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“More Needs To Be Done!” – Do You Think?

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

This post is the 1,500th on this blog! I hope that you’ve found our insights useful. We’ve certainly appreciated the feedback – comments, questions, and likes – throughout the years. A lot of good debate has flowed from the ideas that we have expressed and we hope that it continues. The purpose of this blog is to provide education to those engaged in the pension/retirement industry. We have an incredible responsibility to millions of American workers who are counting on us to help provide a dignified retirement. A goal that is becoming more challenging every day.

As stated numerous times, doing the same-old-same-old is not working. How do we know? Just look at the surveys that regularly appear in our industry’s media outlets. Here is one from MissionSquare Research Institute done in collaboration with Greenwald Research. The survey reached a nationally representative sample of 1,009 state and local government workers between September 12 and October 4. What they found is upsetting, if not surprising. According to the research, “81% are concerned they won’t have enough money to last throughout retirement, and 78% doubt they’ll have enough to live comfortably during their golden years.”

Some of the other findings in the survey also tell a sad story. In fact, 73% of respondents are concerned they won’t be able to retire on time, while the same number are unsure whether they’ll have sufficient emergency savings. How terrible. The part about being able to retire “on time” is not often in the workers control wether because of health and the ability to continue to do the required task or as a result of other plans by their employer. Amazingly, public sector workers believe that their current retirement situation is better than those in the private sector. Wow, if that isn’t telling of the crisis unfolding in this country.

Given these results, it shouldn’t be shocking that unions are seeking a return of DB plans as the primary retirement vehicle. We know that asking untrained individuals to fund, manage, and then disburse a “benefit” through a defined contribution plan is poor policy. We’ve seen the results and they are horrid, with median balances for all age groups being significantly below the level needed to have any kind of retirement. Currently, the International Association of Machinists and Aerospace Workers are on strike at Boeing, and a major sticking point is the union’s desire to see a reopening of Boeing’s frozen DB plan.

We’ve also recently seen the UAW and ILA memberships seek access to DB plans. It shouldn’t be a shock given the ineffectiveness of DC plans that were once considered supplemental to pensions. Again, asking the American worker to fund a DC offering with little to no disposable income, investment acumen, or a crystal ball to help with longevity concerns is just foolish. Yes, there is more to do, much more! It is time to realize that DB plans are the only true retirement vehicle and one that helps retain and attract talented workers who aren’t easily replaced. Wake up before the crisis deepens and everyone suffers.

10.28.24
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ARPA Update as of October 25, 2024

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

Welcome to the last week of October. Like many of us, I can’t wait to see my children’s and grandchildren’s costumes on Thursday. The weather in NJ will be more like June than the end of October. Enjoy!

With regard to the PBGC’s effort to implement the ARPA pension legislation, last week’s activity was rather muted. I’m happy to report that we had one plan’s application approved, as I.B.E.W. Pacific Coast Pension Fund will receive $75.5 million in SFA and interest for 3,318 plan participants. This brings the number of approved applications to 95 and the total award of SFA to $68.8 billion. There are still 107 applications that are in the queue to eventually (hopefully) receive special financial assistance, with 64 yet to file an initial application.

Also, during the past week, we had the Laborers’ Local No. 265 Pension Plan withdraw its application. That plan is seeking $55.6 million for 1,460 members of its plan. This was the initial application for this fund which had been filed on July 11, 2024. There has been a total of 117 applications filed and withdrawn throughout the ARPA implementation. Some funds have seen multiple applications withdrawn and resubmitted.

Given the limited activity last week, it isn’t surprising to learn that the eFiling Portal remains temporarily closed. There is still much to accomplish with this legislation and time, although not currently an issue, will become one should this process linger beyond 2025.

Lastly, the recent move up in US Treasury rates bodes well for those plans receiving SFA and wanting to use cash flow matching to secure the promised benefits. Ryan ALM is always willing to produce an initial analysis on what can be achieved through CFM in terms of a coverage period. Don’t hesitate to reach out to us.

10.21.24
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ARPA Update as of October 18, 2024

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

Major League baseball finally has the last two competitors for this year’s World Series. As a Mets’ fan, I would have appreciated a different outcome, but it was a surprisingly good season for the team from Flushing! Good luck to the Yankees and Dodgers.

With regard to ARPA and the PBGC’s effort to implement this important pension legislation, last week provided just a couple of updates for us to digest. There were no new applications submitted, approved or denied. The PBGC’s eFiling Portal remains temporarily closed at this time. There were also no new systems seeking to be added to the waitlist at this time.

There was one application withdrawn. PA Local 47 Bricklayers and Allied Craftsmen Pension Plan, a non-priority group plan, withdrew its initial application last week that was seeking $8.3 million for the 296 participants in the plan.

The last bit of activity to discuss relates to the repayment of excess SFA as a result of census corrections. Teamsters Local Union No. 52 Pension Fund became the 22nd plan to repay a portion of their SFA received. In the case of Local No. 52, they repaid $1.1 million, which represented 1.15% of their grant. The largest repayment to date has been the $126 million repaid by Central States (0.35% of grant). In terms of percentages, the Milk Industry Office Employees Pension Trust Fund returned 2.36% of their grant marking the high watermark, while Local Union No. 466 Painters, Decorators and Paperhangers Pension Plan, was asked to return only 0.11% of their reward.

Finally, US interest rates have risen significantly since the Fed’s first rate cut on September 18th, as highlighted in the graph below. The higher rates reduce the present value of those future benefit payments and helps to stretch the coverage period provided by the SFA.

10.16.24
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Milliman: Public Pension Funded Ratio at 82.8%

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

Milliman recently released results for its Public Pension Funding Index (PPFI), which covers the nation’s 100 largest public defined benefit plans.

Positive equity market performance in September increased the Milliman 100 PPFI funded ratio from 82.0% at the end of August to 82.8% as of September 30, representing the highest level since March 31, 2022, prior to the Fed’s aggressive rate increases. The previous high-water mark stood at 82.7%. The improved funding for Milliman’s PPFI plans was driven by an estimated 1.4% aggregate return for September 2024 (9.4% for the YTD period). Total fund performance for these 100 public plans ranged from an estimated 0.7% to 2.1% for the month. As a result of the relatively strong performance, PPFI plans gained approximately $72 billion in MV during the latest month. The asset growth was offset by negative cash flow amounting to about $10 billion. It is estimated that the current asset shortfall relative to accrued liabilities is about $1.138 trillion as of September 30. 

In addition, it was reported that an additional 5 of the PPFI members had achieved a 90% or better funded status (34 plans have now eclipsed this level), while regrettably, 14 of the constituents remain at <60%. Given that changing US interest rates do not impact the calculation for pension liabilities under GASB accounting, which uses the ROA as the liability discount rate, the improvement in the collective funded status may be overstated, as US rates continued to decline throughout the third quarter following an upward trajectory to start the calendar year.