Tag Archives: funded status

11.06.25
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You Don’t Say!

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

Morgan Stanley has published the results from their Taft-Hartley survey, in which they have to provided “insights into how Taft-Hartley plans are managing priorities and navigating challenges to strengthen their plans”. I sincerely appreciate MS’s effort and the output that they published. According to MS, T-H plans have as their top priority (67% of respondents) delivering promised benefits without increasing employer’s contributions. That seems quite appropriate. What doesn’t seem to jive with that statement is the fact that only 29% that improving or maintaining the plan’s funded status was important. Sorry to burst your bubble plan trustees, but you aren’t going to be able to accomplish your top priority without stabilizing the funded status/ratio by getting off the performance rollercoaster.

Interestingly, T-H trustees were concerned about market volatility (84%) and achieving desired investment performance while managing risk (69%). Well, again, traditional asset allocation structures guarantee volatility and NOT success. If you want to deliver promised benefits without increasing contributions, you must adopt a new approach to asset allocation and risk management. Doing the same old, same old won’t work.

I agree that the primary objective in managing a DB plan, T-H, public, or private, is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is not a return game. Adopting a new asset allocation in which the assets are divided among two buckets – liquidity and growth, will ensure that the promises (monthly benefits) are met every month chronologically as far into the future that the assets will cover delivering the promised benefits. However, just adopting this bifurcated asset allocation won’t get you off the rollercoaster of returns and reduce market volatility. One needs to adopt an asset/liability focus in which asset cash flows (bond interest and principal) will be matched against liability cash flows of benefits and expenses.

This approach will significantly reduce the volatility associated with markets as your pension plan’s assets and liabilities will now move in lockstep for that portion of the portfolio. As the funded status improves, you can port more assets from the growth portfolio to the liquidity bucket. It will also buys time for the remaining growth assets to help wade through choppy markets. According to the study, 47% of respondents that had an allocation to alternatives had between 20% and 40%. This allocation clearly impacts the liquidity available to the plan’s sponsor to meet those promises. If allocations remain at these levels, it is imperative to adopt this allocation framework.

Furthermore, given today’s equity valuations and abundant uncertainty surrounding interest rates, inflation, geopolitical risk, etc., having a portion of the pension assets in a risk mitigating strategy is critically important. Thanks, again, to MS for conducting this survey and for bubbling up these concerns.

10.21.25
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Milliman: Another good month for pension funding

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

Whether one is referring to public pensions or private DB plans, September was a continuation of the positive momentum experienced for most of 2025. Milliman has reported on both the Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans and its Public Pension Funding Index (PPFI), which analyzes data from the nation’s 100 largest public defined benefit plans.

Milliman estimates that public pension funds saw aggregate returns of 1.7%, while corporate plans produced an average return for the month of 2.5%. As a result of these gains (sixth consecutive gain), public pension funded ratios stand at 85.4% up from 84.2% at the end of August. Corporate plans are now showing an aggregate funded ratio of 106.5%, marking the highest level since just before the Great Financial Crisis (GFC).

Public pension fund assets are now $5.66 trillion versus liabilities of $6.63 trillion, while corporate plans added $26 billion to their collective net assets increasing the funded status surplus to $80 billion. For corporate plans, the strong 2.5% estimated return was more than enough to overcome the decline in the discount rate to 5.36%, a pattern that has persisted for much of 2025.

“Robust returns helped corporate pension funding levels improve for the sixth straight month in September,” said Zorast Wadia, author of the Milliman PFI. “With more declines in discount rates likely ahead, funded ratios may lose ground unless plan assets move in lockstep with liabilities.”

“Thanks to continued strong investment performance, public pension funding levels continued to improve in September, and unfunded liabilities are now below the critical $1 trillion threshold for the first time since 2021,” said Becky Sielman, co-author of the Milliman PPFI. “Now, 45 of the 100 PPFI plans are more than 90% funded while only 11 are less than 60% funded, underscoring the continued health of public pensions.”

Discount rates have so far fallen in October. It will be interesting to see if returns can once again prop up funded status for corporate America. It will also be interesting to see how the different accounting standards (GASB vs. FASB) impact October’s results. A small gain for corporate plans may not be enough to overcome the potential growth in liabilities, as interest rates decline, but that small return may look just fine for public pension plans, that don’t mark liabilities to market only assets.

View this Month’s complete Pension Funding Index.

View the Milliman 100 Public Pension Funding Index.

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.

04.17.25
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The Intrinsic Value of Bonds

Ronald J. Ryan, CFA, Chairman

The true value of bonds is the certainty of their cash flows (interest + principal payments). I don’t believe there is another asset class with such attributes. This is why bonds have traditionally been the asset choice for LDI strategies in general and, defeasement specifically. Given that the true objective of a pension is to secure benefits in a cost-efficient manner with prudent risk then cash flow matching with bonds is a best fit. In the 1970s and 1980s cash flow matching was called Dedication and was the main pension strategy at that time.

Today we live in a volatile and uncertain financial world. Volatility of a pension’s funded status is not a good thing and leads to volatility in contribution costs which are calculated annually based on the present value of assets versus the present value of liabilities. Since 2000 contribution costs have spiked and for many pension plans are 5 to 10x higher than 1999. One would think that a prudent plan sponsor would install a strategy to derisk their pension and reduce or even eliminate this volatility. Cash flow matching (CFM) is the answer. CFM fully funds and matches the monthly liability cash flows (future values) thereby eliminating the present value volatility that plaques most pensions.

As our name implies, Ryan ALM is an Asset Liability Manager specializing in CFM. As the founder of Ryan ALM, my experience with CFM goes back to the 1970s when I was the Director of Fixed Income research at Lehman Bros. Our current CFM model (Liability Beta Portfolio™ or LBP) is a cost optimization model that will fully fund monthly liability cash flows at the lowest cost to the plan sponsor. Our model will reduce funding costs by about 2% per year (1-10 years of liability cash flows = 20% cost reduction). Moreover, there are several other significant benefits to our LBP:

  • LBP de-risks the plan by cash flow matching benefit payments with certainty
  • LBP provides liquidity to fully fund liabilities so no need for a cash sweep
  • Mitigates interest rate risk since it is funding benefits (future values)
  • LBP reduces asset management costs (Ryan ALM fee = 15 bps)
  • Enhances ROA by out-yielding active bond management 
  • Reduces volatility of the funded ratio + contributions
  • Buys time for Alpha assets to grow unencumbered

  “Where is the knowledge we have lost in information” T.S. Eliot

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%.

04.03.25
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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.

03.04.25
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What’s Your Duration?

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

The recent rise in U.S. Treasuries had us redoubling our effort to encourage plan sponsors of U.S. pension plans to take some risk off the table by using cash flow matching (CFM) to defease a portion of the plan’s liabilities, given all the uncertainties in the markets and our economy. We were successful in some instances, but for a majority of Pension America, the use of CFM is still not the norm. Instead, many sponsors and their advisors have elected to continue to use highly interest rate sensitive “core” fixed income offerings most likely benchmarked to the Bloomberg Barclays Aggregate Index (Agg).

For those plan sponsors that maintained the let-it-ride mentality, they are probably celebrating the fact that Treasury rates have fallen rather significantly in the last week or so as a result of all of the uncertainties cited above – including inflation, tariffs, geopolitical risk, stretched equity valuations, etc. Their “core” fixed income allocation will have benefited from the decline in rates, but by how much? The Bloomberg Barclays Aggregate Index (Agg) has a duration of 6.1 years and a YTW of 4.58%, as of yesterday. YTD performance had the Agg up 2.78%. Not bad for fixed income 2+ months into the new year, but again, equities have been spanked in the last week, and the S&P 500 is down -3.1% in the last 5 days. So, maintaining that exposure sure hasn’t been beneficial.

Also, remember that the duration of the average DB pension plan is around 12 years. Given the 12-year duration, the price movement of pension liabilities, which are bond-like in nature, is currently twice that of the Aggregate index. A decline in rates might help your core fixed income exposure, but it is doing little to protect your plan’s funded status/funded ratio. The use of CFM would have insulated your plan from the interest rate risk associated with your pension liabilities. As rates fell, both assets and the present value of those liabilities would have appreciated, but in lockstep! The funded status for that segment of your asset allocation would have been insulated.

Why wait to protect your hard work in getting funded ratios to levels not seen in recent years? A CFM strategy provides numerous benefits, including providing liquidity on a monthly basis to ensure that benefits and expenses are met when due, reducing the cost to fund liabilities by 20% to 40% extending the investing horizon allowing for choppy markets to come and go with little impact on the plan, and protecting your funded status which helps mitigate volatility in contributions. Seems pretty compelling to me.

01.23.25
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That Step Isn’t Necessary!

By: Russ Kamp, CEO, Ryan ALM, Inc

I recently stumbled over a brief article that touched on LDI. I’m always interested in absorbing everything that I can on this subject. I was particularly thrilled when the author stated, “since LDI was recognized as best practice for defined benefit (DB) plans…” – YES! I’m not sure where that proclamation came from, but I agree with the sentiments. The balance of that sentence read, “…sponsors have implemented investment strategies as a journey.”

The initial steps on this journey were for plan sponsors to “simply extend the duration of their fixed income using longer duration market-based benchmarks.” Clearly, the author is referencing duration matching strategies as the LDI product of choice during that phase. According to the author, the next phase in this LDI journey was the use of both credit and Treasuries to better align the portfolio with a plan’s liability risk profile.

Well, we are supposedly entering a third phase in this LDI journey given the improved funded status and “outsized” allocations to fixed income. The question they posed: “How do we diversify the growing fixed income allocation?” Their answer, add a host of non-traditional LDI fixed income products, including private debt and securitized products, to the toolkit to add further yield and return. No, no, and no!

As mentioned previously, funded status/ratios have improved dramatically. According to this report, corporate plans have a funded ratio of 111% at the end of 2024 based on their firm’s Pension Solutions Monitor. Given that level of funding, the only thing that these plans should be doing is engaging a cash flow matching (CFM) strategy to SECURE all the promises that have been given to the plan participants. You’ve WON the pension game. Congratulations! There is no reason for a third phase in the LDI journey. There likely wasn’t a need for the second phase, but that’s water over the dam.

We, at Ryan ALM, believe that CFM is a superior offering within the array of LDI strategies, as it not only provides the necessary liquidity to meet monthly liability cash flows, but it duration matches each and every month of an assignment. Ask us to CFM the next 10 years, we will have 120 duration matches. Most duration matching strategies use either an average duration or a few key rates along the yield curve. Since duration is price sensitive, it changes constantly.  In addition, yield curves do not move in parallel shifts making the management of duration a difficult target.

With CFM you can use STRIPS, Treasuries, investment grade corporates or a combination of these highly liquid assets. You don’t need to introduce less liquid and more complex products. A CFM strategy is all you need to accomplish the pension objective. A CFM strategy provides certainty of the cash flows which is a critical and necessary feature to fully fund liabilities. This feature does not exist in private debt and securitized products. As a reminder, the pension objective is not a return target. It is the securing of the promised benefits at a reasonable cost and with prudent risk. Don’t risk what you’ve achieved. Lock in your funded status and secure the benefits. This strategy is designed as a “sleep well at night” offering. I think that you deserve to sleep like a baby!

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.