Tag Archives: funded status

06.05.26
by

It is Our Mission!

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

The individual professionals on the Ryan ALM, Inc. team have both a personal and professional mission which drives us every day! What is that mission? We are driven with the goal of protecting and preserving defined benefit pension plans, which we believe are the only true retirement plans. Any other “retirement” vehicle pales in comparison. Yet, our industry has adopted practices which we believe are detrimental to the long-term stability of these critically important plans.

Pursuing an objective focused on return has created an environment that has these DB plans on a perpetual rollercoaster of performance, ultimately creating unnecessary instability and uncertainty as it relates to both contributions and funded status. As a reminder, we believe that the primary objective in managing a DB pension plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is not a performance objective.

Recently, I reviewed a pension plan that believed its biggest challenge was improving returns. After examining its cash flow needs, we discovered the larger issue was liquidity. By addressing liquidity first, the trustees reduced risk, a key action in these uncertain times, while improving confidence in their ability to meet future benefit payments. Furthermore, most trustees I speak with are wrestling with the same issues—liquidity, uncertainty, and how much risk is appropriate at this stage of the investing cycle.

Through Cash Flow Matching (CFM), a dedicated investment-grade bond portfolio in which we carefully match asset cash flows of principal and interest against the liability cash flows of benefits and expenses, we are able to bring certainty to your cash flow needs through enhanced liquidity. I’d be happy to walk through your plan’s cash flow profile and show you how a cash flow matching approach would support your current asset allocation.

Every pension plan is different, but every trustee shares the same responsibility: ensuring promised benefits are paid. Markets will do what markets do. Interest rates will rise and fall. Economic uncertainty will come and go. The question is whether your pension plan is structured to withstand those events without jeopardizing the promises made to participants.

If you’re not completely certain that your fund is structured appropriately, let us at Ryan ALM work with you to protect and preserve your DB plan, as it is our collective mission. Your fund’s participants will appreciate knowing that their promised benefits have been secured for some period of time. If you’d like a second opinion on your plan’s liquidity profile, cash flow needs, or overall asset allocation strategy, let’s talk. A 30-minute conversation may help you see risks—and opportunities—that aren’t visible through a funded ratio or return assumption lens.

03.25.26
by

What is My Funded Ratio? Who Cares!

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

The funded ratio of a DB pension plan gets a lot of attention, especially if it is perceived to be weak. But does the funded ratio truly tell you the whole story as to the financial health of a DB pension plan? We, at Ryan ALM, Inc. don’t think so.

So, how is the funded ratio calculated:

Funded ratio = MV of plan assets / plan liabilities earned to date X 100

The market value of assets is a present value (PV) calculation. The market value of liabilities is the future value of liabilities earned to date discounted back to a PV calculation based on a discount rate. For public and multiemployer plans the discount rate tends to be the fund’s return on asset assumption (ROA), while it is an AA corporate blended rate for private pensions. In today’s interest rate environment, the discount rate for private plans will be roughly 1.5% less than the discount rate based on the average ROA. That means that liabilities for private funds will have a greater current value than the value of liabilities calculated based on the discount rate using the ROA. Oh, okay, so the choice of a discount rate can change my funded ratio. That’s interesting. So that tells me that if I wanted to improve my funded ratio, all I’d have to do is increase my discount rate to lower the PV of my liabilities. That’s very interesting.

So, it appears that the funded ratio calculation can be manipulated to some extent. As we think about the formula above, is there anything missing? Yes, where are the future contributions, which can be significant. Why are future payment liabilities in the calculation, but projected contributions, which are future assets of the fund, not included? Common thinking suggests that those future contributions aren’t guaranteed, which is why they aren’t factored into the funded ratio calculation. However, is that a correct assumption? In doing some research, it appears >80% of DB pension funds receive 100% of the annual required contribution (ARC). Even NJ’s public pension system is making the ARC and then some.

We recently had a conversation with a large plan sponsor who thought that their fund was <50% funded based on the formula above. Not surprisingly, they were very focused on this ratio and looking for investment strategies that could potentially enhance it. As an FYI, this plan’s future contributions as forecasted by their actuary were significant. In fact, future contributions were so large that they were equal to 73% of the forecasted liabilities! Yes, without including the pension fund’s current assets, this plan was 73% funded, provided those projected contributions were met which they have been for more than a decade.

So, given these forecasted contributions is that pension fund really <50% funded?

In another example, the same fund that thought that they were poorly funded, could defease net pension liabilities for the next 33-years. How is it possible that a plan that believes it is <50% funded able to significantly reduce risk, enhance liquidity, and SECURE pension promises for 33-years? Furthermore, this fund was going to establish a $4.4 billion surplus on the day that those benefits and expenses were defeased for 33-years. If it just earned the projected ROA, that $4.4 billion would grow to $34.2 billion during that 33-year period. Wow! 

So, I ask once more, does that sound like a plan in financial distress, which a funded ratio of <50% might suggest? NO!

The funded ratio is but one measure of a pension plan’s health. Unfortunately, many in our industry would look at that # and say that more risk needs to be taken to achieve “full funding” down the road, when in fact reducing risk through a cash flow matching (CFM) strategy is the appropriate approach. It is past the time to get off the scary asset allocation rollercoaster. 

02.25.26
by

New Jersey’s Pension System’s “High” Investment Return

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

As a taxpaying resident in New Jersey and a huge supporter of defined benefit plans who has a daughter in the system, I was happy to read that NJ’s pension systems generated strong investment returns in fiscal year 2025, reporting a nearly 11% return. Terrific. Yet, despite the above target return (7.0% ROA), the impact on the system’s funded status was negative. Yes, the funded ratio improved (assets/liabilities), but the funded status further deteriorated (funding gap in $s). Since the system is striving for 7% and the combined funded ratio of the various plans is <50%, a system like NJ’s would need to double the annual return on asset target just to keep the $ deficit stable.

It is great to see that NJ is finally bringing some financial discipline to the management of its pensions, with contributions at least matching the Actuarial Determined Contribution (ADC), but after decades of failing to do so (I think since Washington slept here), the systems are in need of significant funding improvement. Trying to generate outsized gains through a riskier asset allocation is not a long-term winning formula, often leading to greater annually required contributions when markets behave badly and assets get whacked.

The management of DB pension plans is not rocket science if the basics of sound pension management are followed. For instance, plans receiving the full ADC have on average an 80% funded ratio, while those not receiving the full ADC sit with funded ratios <70% (NCPERS study). Plans sitting with funded ratios below 50% are not likely to create enough excess return relative to the annual ROA to be able to close the funding gap. This often leads to plans making difficult decisions such as creating plans with multiple tiers, which I really despise.

Plans should focus on meeting the ADC, securing the promised benefits in the near-term, which buys time for the growth or alpha assets to perform, and reduce costs of administration, including management fees. DB plans are critical to the creation of a dignified retirement. Having a significant percentage of our seniors lacking the financial wherewithal to remain active in our economy is a major problem with long-term implications.

02.18.26
by

Good Question!

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

We occasionally post questions received in reaction to our blogs in new blog posts since many of our readers might have similar thoughts/ideas. In reaction to yesterday’s post, “All-time High Funded Ratio” a reader calling themselves LoudlyObservant (great name) stated the following:

Why wouldn’t such well-funded plans take steps to lock in the funding of their beneficiary payments through a cash flow matching portfolio? Isn’t the first fiduciary duty of loyalty expressed in controlling the relevant risk to the beneficiaries, which involves BOTH securing adequate assets and then actually funding the payments? Many of these plans have hit the first goal but are still exposed to funding risk. With a ready solution at hand, the plan sponsors open themselves to criticism for not acting on their second responsibility.

Thank you, Loudly! Great questions and observations. We often talk about the fact that pension plans at all funding levels need liquidity, not just well-funded plans, but when you have a universe of plans that on average are fully funded, why not dramatically reduce risk. We witnessed what happened to DB pension plans at the end of 1999, when most plans were well overfunded only to see the funded status plummet and contribution expenses explode following two major market corrections.

I’m neither smart enough nor is my crystal ball better than anyone else’s to know if a major market correction is on the horizon but why take the chance unnecessarily. We’ve seen a significant percentage of Special Financial Assistance (SFA) recipients engage in cash flow matching to secure the SFA assets and the benefits that they will protect. Why not adopt CFM for the legacy assets, too? As we’ve mentioned, we are providing a service to you and your plan participants. It isn’t just another product. Time to get off the proverbial rollercoaster of returns and secure the promises and your plan’s funded status.

11.06.25
by

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
by

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
by

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
by

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
by

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
by

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.