Tag Archives: indexes

09.24.25
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You Can’t Manage What You Don’t Measure!

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

Nearly 10 years ago, before joining Ryan ALM, I wrote an article about the idea that plan sponsors need to focus on their fund’s liabilities, as much as, if not more than, their plan’s assets. It shouldn’t be a shocking statement since the only reason that the plan exists is to fund a promise (benefit) that has been granted. Yet I would often get strange looks and frowns every time that concept was mentioned.

Why? Well, for over 50 years, pension sponsors and their consultants have been under the impression that if the return on assets (ROA) objective is achieved or exceeded, then the plan’s funding needs shall be sated. Unfortunately, this is just not true. A plan can achieve the ROA and then some, only to have the Funded Ratio decline and the Funded Status deteriorate, as liability growth exceeds asset growth.

We place liabilities – and the management of plan assets versus those liabilities – at the forefront of our approach to managing DB plans. Pension America has seen a significant demise in the use of DB plans, and we would suggest it has to do, in part, with how they’ve been managed. It will only get worse if we continue to support the notion that only the asset side of the pension equation is relevant. Focusing exclusively on the asset side of the equation with little or no integration with the plan’s liabilities has created an asset allocation that can be completely mismatched versus liabilities. It is time to adopt a new approach before the remaining 23,000 or so DB plans are all gone!

Our Suggestion

As this article’s title suggests, to manage the liability side of the equation, one needs a tool to measure and monitor the growth in liabilities, and it needs to be more frequent than the actuarial report that is an annual document usually available 3-6 months following the end of the calendar or fiscal year.

Such a tool exists – it is readily available, yet under-appreciated and certainly under-utilized! Ryan ALM has provided this tool to DB plan sponsors; namely, a Custom Liability Index (CLI), since 1991. This is a real time (available monthly or quarterly) index based on a plan’s specific projected liabilities. Furthermore, the output from this index should be the primary objective for a DB plan and not asset growth versus some hybrid index. Importantly, the CLI will provide to a plan sponsor (and their consultant) the following summary statistics on the liabilities, including:

  • Term-structure, Duration and Yield to Worst
  • Growth Rate of the Liabilities
  • Interest Rate Sensitivity
  • Present Value based on several discount rates

Different discount rates are used depending on the type of plan. GASB allows the ROA to be used as the discount rate for public pension plans, while FASB has a AA Corporate blended rate (ASC 715) as the primary discount rate for corporate plans. Having the ability (transparency) to see a plan’s liabilities at various discount rates with projected contributions is an incredible tool for both contribution management and asset allocation. Don’t hesitate to reach out to us for more information on how you can get a Custom Liability Index for your pension plan.

05.01.24
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Another Challenging Month for US Fixed Income

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

S&P Dow Jones is out with its monthly “Dash Board” on a variety of benchmarks, both domestic and foreign. April proved challenging for both US equities and bonds. With regard to stocks, the S&P 500 was down -4.1% bringing the YTD performance to +6.04%. It was a tougher environment for both mid cap (-6.0%) and small cap (-5.6%). Small caps (S&P 600) continue to be pressured and the index is now down -3.3% YTD. As US interest rates continue on a course higher, US equities will continue to be challenged.

The higher US rates are also continuing to pressure US fixed income. The Aggregate Index produced a -1.8% April, and the index is now down -2.4% since the start of 2024 despite the rather robust YTM of 5.3%. As we’ve discussed on many occasions, bonds are the only asset class with a known cash flow of a terminal value and contractual coupon payments. As a result, bonds should be used for the certainty of those cash flows and specifically to defease pension liabilities. As a reminder, pension liabilities are bond-like in nature and they will move with changes in interest rates. Don’t use bonds as a total return strategy, as they will not perform in a rising rate environment. Sure, the nearly 40-year decline in rates made bonds and their historical performance look wonderful, but that secular trend is over.

Use the fixed income allocation to match asset cash flows of interest and principal to the liability cash flows of benefits and expenses. As a result, that portion of the total assets portfolio will have mitigated interest rate risk, while SECURING the promised benefits. Having ample liquidity is essential. Using bonds to defease pension liabilities ensures that the necessary liquidity will be available as needed. The current US interest rate environment may be pressuring total return-seeking fixed income managers, but it is proving cash flow matching programs with a very healthy YTM that dramatically reduces the cost of those future value payments. Don’t waste this golden opportunity.