Tag Archives: Fiduciary

04.30.24
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Healthier Than Ever? Nah!

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

P&I produced an article yesterday titled, “Corporate Pension Funds Are Fully Funded, Healthier Than Ever. Now What?” According to Milliman, corporate pension plans are averaging roughly a funded ratio of 106%. This represents a healthy funded status, but it is by no means the healthiest ever. One may recall that corporate plans were funded in excess of 120% as recently as 2000. In what might be more shocking news, public pension plans were too when using a market discount rate (ASC 715 discount rate). Today, those public pension plans have a funded status of roughly 80% according to Milliman’s latest public fund report.

The question, “Now what”? is absolutely the right question to be asking. Many corporate plans have already begun de-risking, as the average exposure to fixed income is >45% according to P&I’s asset allocation survey through November 2023. Unfortunately, public pension systems still sit with only about 18% exposure to US fixed income, preferring a “let it ride” mentality as equities and alternatives account for more than 75% of the average plan’s asset allocation. Is this the right move? No. The move into alternatives has dried up liquidity, increased fees, and reduced transparency. Furthermore, just because a public plan believes that its sponsor is perpetual, does that make the system sustainable? You may want to be reminded about Jacksonville Police and Fire. There are other examples, too.

Whether the pension plan is corporate, multiemployer, or public, the asset allocation should reflect the funded status. There is no reason that a 60% funded plan should have the same asset allocation as one that is 90% or better funded. All plans should have both liquidity and growth buckets. The liquidity bucket will be a bond allocation (investment grade corporates in our case) that matches asset cash flows to liability cash flows of benefits and expenses. That bucket will provide all of the necessary liquidity as far into the future as the pension system can afford. The remaining assets will be focused on outperforming future liability growth. These assets will be non-bonds that now have the benefit of an extended investing horizon to grow unencumbered. Forcing liquidity in environments in which natural liquidity has been compromised only serves to exacerbate the downward spiral.

Pension America has the opportunity to stabilize the funded status and contribution expenses. They also have the chance to SECURE a portion of the promises. How comforting! We saw this movie a little more than 20 years ago. Are we going to treat this opportunity as a Ground Hog Day event and do nothing or are we going to be thoughtful in taking appropriate measures to reduce risk before the markets bludgeon the funded status? The time to act is now. Not after the fact.

03.08.24
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A Contrarian Approach That is Becoming More Common?

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

I suspect that some (perhaps) many folks in our industry are becoming a little tired of my constant drum beat requesting a change in how pension plans are managed. I’m sorry if that is the case, but I have a reason to speak out often, if not loudly. My goal/mission, and that of Ryan ALM, Inc., is to protect and preserve defined benefit plans for the masses. I believe wholeheartedly that DB plans are superior to any other retirement program since they provide the monthly promise with little involvement from the participant, who may have particularly wonderful skills used in their day-to-day lives, but investing isn’t likely one of them.

By espousing Cash Flow Matching (CFM) as an important investment strategy, particularly in this period of attractive interest rates, we are bringing pension management generally and asset allocation strategies specifically back to its roots. The SECURING of the pension promise must be the primary objective for plan fiduciaries. Better yet, it should be accomplished at a reasonable cost and with prudent risk. As I’ve discussed before, a CFM strategy brings an element of certainty to the management of pensions that have embraced uncertainty through asset allocation strategies that are subject to the whims of the markets.

The riding of the asset allocation rollercoaster in pursuit of a performance objective does little to secure the pension promise, but it certainly adds to annual volatility of both the funded status and contribution expenses. Is that the outcome that the sponsors of these plans and the participants want? Heck no! Are we at Ryan ALM tilting at or own windmills? I sure hope not.

I’ve been heartened recently to read several articles favoring a return to pension basics, including the focus on the pension promise to drive asset allocation through a CFM implementation. I’m not afraid to be a lone wolf, and nearly 1,400 blog posts support that claim, but it is comforting to have some company, as being a contrarian outside of the “herd” has been described as being as painful as chewing off one’s left arm – OUCH! In one specific instance, Stephen Campisi, recently posted his article on LinkedIn.com, in which he espoused a similar bifurcated approach – liquidity and growth buckets – to pension asset allocation. He also reminded everyone that “aiming” at the correct objective was essential. In this case, he correctly cited that the objective was the promise that had been given to the participant.

Nothing would please me more than to have the entire industry once again realize the significant importance of the defined benefit plan and its role in securing a dignified retirement. Eliminating the rollercoaster cycles of performance will go a long way to preserving their use. Adopting a CFM strategy that secures the monthly promises at a reasonable cost and with prudent risk is the first step in the process. I look forward to you jumping on our bandwagon.

05.03.14
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What are you paying for?

A reflection:

I was very fortunate to be hired into the investment industry in 1981. Two gentlemen, Larry Zielinski and Ted Swedock, took a huge leap hiring a not very qualified candidate out of undergraduate business school to fill a role as an analyst in a small consulting group.  I was the first-non consultant or assistant to be hired.  The role’s responsibilities were vast, and the experience that I gained was immeasurable.

But, the most important knowledge that was shared with me was a comment that Larry made on the first day that I began working at Janney Montgomery Scott’s Investment Management Controls division.  Larry told me that anyone or any company can produce vast quantities of paper and/or fancy reports.  A consultant is only worth their salt if they have the ability to interpret the information that they are passing on and at the same time are willing to make recommendations based on their interpretation.

As I sit back today and reflect on my nearly 33 years in this business, I can’t help but remember how important those words were that Larry uttered to me in October 1981.  I’ve tried to follow his lead since day one.  Initially, I didn’t have a clue about how most things truly worked in the investment industry. Today, as we build KCS, we continue to live by Larry’s example.  We can produce all the fancy reports in the world, but they aren’t worth the paper they are printed on if we also don’t share with our clients and prospects our recommendations as to a course that they should follow.  We are Fiduciaries, and we take that responsibility seriously.

As you may know, every month we produce at least one article on an investment subject. We don’t pull any punches.  If you want to know how we feel on a subject, just go to our website and look under the heading “Publications.”  Everything that we’ve produced is there.  I don’t know how many other consultants/consulting firms are regularly producing articles, but they should at least be willing to take a stand on those subjects most important to their clients.

At KCS, we are concerned about retirement security for most Americans.  We do believe that the demise of the defined benefit plan will produce negative economic and social consequences for a large segment of our population.   We don’t think that the status quo approach to managing DB plans is working.  We believe that our clients and their beneficiaries need new thinking and approaches on a variety of retirement subjects.  We’ve articulated those.  Has your consultant? So, I ask again, are you getting what you are paying for?

12.03.13
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Paradigm Shift or Back to the Future?

Paradigm Shift or Back to the Future?

Is the sun setting on the traditional advisory asset consulting with the dawn of the Outsourced Chief Investment Officer (OCIO)?  As biased advisory asset consultants, we really don’t believe that the day of reckoning is upon us! There remains a role for traditional asset consultants, but certainly an asset consultant’s role is evolving, and it is likely to continue.  Consultant specialist roles have been around since the early to mid 80’s, when both venture and real estate consultants first emerged, followed by consultants focusing on the broader alternative landscape.   KCS’s focus as the liability aware consultant is a unique specialty, too.  However, in most cases, the plan sponsor or asset owner retains day-to-day discretion over the asset base. With plan and fund sponsors outsourcing discretionary responsibility, the specialist role has been taken to a new level.