Tag Archives: Interest Rates

10.27.25
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ARPA Update as of October 24, 2025

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

If it is a Monday, it is ARPA/SFA update day. I’m bringing you this update from Fort Lauderdale, FL, where I’m attending and speaking at the NCPERS Fall conference. It looks like a wonderful agenda for the next few days. Regarding ARPA, how did the PBGC do last week? Let’s explore.

Last week saw limited action with only two applications received, including a revised application from a Priority Group 1 member. As you may recall, this was the first group permitted to submit applications all the way back in July 2021! Only 25 of the 30 members of that cohort have received Special Financial Assistance to date. Richmond, VA based Bricklayers Union Local No. 1 Pension Fund of Virginia, submitted a revised application seeking $12.9 million for its 395 participants, while International Association of Bridge, Structural, Ornamental and Reinforcing Ironworkers Local No. 79 Pension Fund, submitted an initial application hoping to secure $14.6 for 462 members. As an aside, the Ironworkers would be golden if the SFA desired was based on the length of the plan’s name.

In other ARPA news, or lack thereof, there were no applications approved, and fortunately, none denied. There were no pension plans forced to withdraw an application and none asked to repay a portion of the SFA received due to census errors. However, there was one more plan added to the burgeoning waitlist. The Soft Drink Industry Pension Fund is the 178th none-priority group fund to add its name to the list.

The next couple of months should be quite exciting for the PBGC as it works through the abundant list of applications for non-priority group members. U.S. interest rates have pulled back recently reducing some of the potential coverage period through a CFM strategy, but rates are still significantly higher than they were in 2021 when ARPA began to be implemented. Please reach out to us if you’d like to get a free analysis on what is possible once the SFA is received.

09.23.25
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Buy on the Rumor…

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

After 44-years in the investment industry I’ve pretty much heard most of the sayings, including the phrase “buy on the rumor and sell on the news”. I suspect that most of you have probably heard those words uttered, too. However, it isn’t always easy to point out an example. Here is graph that might just do the trick.

There had been significant anticipation that the U.S Federal Reserve would cut the Fed Funds Rate and last week that expectation was finally realized with a 0.25% trimming. However, it appears that for some of the investment community that reduction wasn’t what they were expecting. As the graph above highlights, the green line representing Treasury yields as of this morning, have risen nicely in just the last 6 days for most maturities 3 months and out, with the exception of the 1-year note. In fact, the 10- and 30-year bonds have seen yields rise roughly 10 bps. Now, we’ve seen more significant moves on a daily basis in the last couple of years, but the timing is what has me thinking.

There are still many who believe that this cut is the first of several between now and the end of 2025. However, there is also some trepidation on the part of some in the bond world given the recent rise in inflation after a prolonged period of decline. As a reminder, the Fed does have a dual mandate focused on both employment and inflation, and although the U.S. labor force has shown signs of weakening, is that weakness creating concerns that dwarf the potential negative impact from rising prices? As stated above, there may also have been some that anticipated the Fed surprising the markets by slicing rates by 0.50% instead of the 0.25% announced.

In any case, the interest rate path is not straight and with curves one’s vision can become obstructed. What we might just see is a steepening of the Treasury yield curve with longer dated maturities maintaining current levels, if not rising, while the Fed does their thing with short-term rates. That steepening in the curve is beneficial for cash flow matching assignments that can span 10- or more years, as the longer the maturity and the higher the yield, the greater the cost reduction to defease future liabilities. Please don’t let this attractive yield environment come and go before securing some of the pension promises.

09.12.25
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Actuaries of DB Pension Plans Prefer Higher Interest Rates

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

I produced a post yesterday, titled “U.S. Rates Likely to Fall – Here’s the Good and Bad”. In that blog post I wrote, “I’d recommend that you not celebrate a potential decline in rates if you are a plan sponsor or asset consultant, unless you are personally looking for a loan.” Falling rates have historically benefited plan assets, and not just bonds, but risk assets, too. But lower rates cause the present value (PV) of liabilities to grow. A 50 bp decline in rates would cause the PV of liabilities to grow by 6% assuming a duration of 12-years. NOT GOOD!

Not being a trained actuary, although I spend a great deal of time communicating with them and working with actuarial output, I was hesitant to make that broad assessment. But subsequent research has provided me with the insights to now make that claim. Yes, unlike plan sponsors and asset consultants that are likely counting down the minutes to a rate cut next week, actuaries do indeed prefer higher interest rates.

Actuaries of DB pension plans, all else being equal, generally prefer higher interest rates when it comes to funding calculations and the plan’s financial position.

Impact of Higher Interest Rates

  • Lower Liabilities: When interest rates (used as the discount rate for future benefit payments) increase, the (PV) of the plan’s obligations may sharply decrease depending on the magnitude of the rate change, making the plan look better funded.
  • Lower Required Contributions: Higher discount rates mean lower calculated required annual contributions for plan sponsors and often lead to lower ongoing pension costs, such as PBGC costs per participant.
  • Potential for Surplus: Sustained periods of higher rates can create or increase pension plan surpluses, improving the financial health of the DB plan and providing flexibility for sponsors.

Why This Preference Exists

  • Discount Rate Role: Actuaries discount future benefit payments using an assumed interest rate tied to high-grade bond yields. The higher this rate, the less money is needed on hand today to meet future obligations.
  • Plan Health: Lower required contributions and lower projected liabilities mean sponsors are less likely to face funding shortfalls or regulatory intervention. Plans become much more sustainable and plan participants can sleep better knowing that the plan is financially healthy.
  • Plan Sponsor Perspective: While actuaries may remain neutral in advising on appropriate economic assumptions (appropriate ROA), almost all calculations and required reports look stronger with higher interest rates. What plan sponsor wouldn’t welcome that reality.

Consequences of Lower Interest Rates

  • Increase in Liabilities: Contrary to the impact of higher rates, lower rates drive up the PV of projected payments, potentially causing underfunded positions and/or the need for larger contributions.
  • Challenge for Plan Continuation: Persistently low interest rates have made DB plans less attractive or sustainable and contributed to a trend of plan terminations, freezes, or conversions to defined contribution or hybrid structures. The sustained U.S. interest rate decline, which spanned nearly four decades (1982-2021), crushed pension funding and led to the dramatic reduction in the use of traditional pension plans.

In summary, actuaries valuing DB pension plans almost always prefer higher interest rates because they result in lower reported liabilities, lower costs, and less financial pressure on employers. Given that 100% of the plan’s liabilities are impacted by movements in rates, everyone associated with DB pensions should be hoping that current interest rate levels are maintained, providing plan sponsors with the opportunity to secure the funded ratio/status through de-risking strategies. A DB pension plan is the gold standard of retirement vehicles and maintaining them is critical in combating the current retirement crisis.

09.05.25
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I’m Concerned! Are You?

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

I’ve been concerned about the U.S. retirement industry for many years, with a particular focus on traditional pensions. The demise of DB pensions is a major social and economic issue for a significant majority of American workers, who fear that their golden years will be greatly tarnished without the support of a traditional DB pension plan coupled with their inability to fund a supplemental retirement vehicle, such as a defined contribution plan.

I recently had hope that the rising U.S. interest rate environment would bring about a sea change in the use of DB pensions, but I haven’t seen the tidal wave yet. That said, the higher rate environment did (could still) provide plan sponsors with the ability to take some risk off the table, but outside of private pensions, I’ve witnessed little movement away from a traditional asset allocation framework. You see, the higher rate environment reduces the present value cost of those future benefit payments improving both the funded ratio and funded status of DB pensions, while possibly reducing ongoing contributions. Securing those benefits, even for just 10-years dramatically reduces risk.

But, again, I’ve witnessed too few plans engaging in alternative asset allocation strategies. That’s not the same as engaging in alternative strategies, which unfortunately continues to be all the rage despite the significant flows into these products, which will likely diminish future returns, and the lack of distributions from them, too. An alternative asset allocation strategy that Ryan ALM supports and recommends is the bifurcation of assets into two buckets – liquidity and growth – as opposed to having all of the plan’s assets focused on the return on asset (ROA) assumption.

By dividing the assets into two buckets, one can achieve multiple goals simultaneously. The liquidity bucket, constituting investment grade bonds, will be used to defease the liability cash flows of benefits and expenses, while the growth or alpha assets can grow unencumbered with the goal of being used to defease future liabilities (current active lives). One of the most important investment tenets is time. As mentioned above, defeasing pension liabilities for even 10-years dramatically enhances the probability of the alpha assets achieving the desired outcome.

So why am I concerned? The lack of risk mitigation is of great concern. I’m tired of watching pensions ride the rollercoaster of returns up and down until something breaks, which usually means contributions go up and benefits go down! Given the great uncertainty related to both the economy and the labor force, why would anyone embrace the status quo resulting in many sleepless nights? Do something, and not just for the sake of doing something. Really do something! Embrace the asset allocation framework that we espouse. Migrate your current core bond allocation to a defeased bond allocation known as cash flow matching (CFM) to bring an element of certainty to the management of your plan.

Listen, if rates fall as a result of a deteriorating labor force and economy, the present value of pension liabilities will rise. Given that scenario, it is highly likely that asset prices will fall, too. That is a lethal combination, and not unique given how many times I’ve seen that play out during my 44-year career. Reach out to us if you aren’t sure how to start the process. We’d be pleased to take you through a series of scenarios so that you can determine what is possible. Perhaps you’ll sleep like a baby after we talk.

08.14.25
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Are Investors About to Get Their Comeuppance?

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

As we’ve discussed in this blog on many occasions, the U.S. interest rate decline from 1982 to 2022 fueled risk assets well beyond their fundamentals. During the rate decline, investors became accustomed to the US Federal Reserve stepping in when markets and the economy looked dicey. There seems to be a massive expectation that the “Fed” will once again support those same risk assets by initiating another rally through a rate decline perhaps as soon as September. Is that action justified? I think not!

Recent inflation data, including today’s PPI that came in at 0.9% vs. 0.2% expected, should give pause to the crowd screaming for lower rates. Yes, employment #s published last week were very weak, and they got weaker when Erika McEntarfer, the commissioner of the Bureau of Labor Statistics, was fired after releasing a jobs report that angered President Donald Trump. In addition, we have Secretary of the Treasury, Scott Bessent, demanding rates be cut by as much as 150-175 bps, claiming that all forecasting “models” suggest the same direction for rates. Is that true? Again, I think not.

You may recall that I published a blog post on July 10, 2025 titled “Taylor-Made”, in which I wrote that the Taylor Rule is an economic formula that provides guidance on how central banks, such as the Federal Reserve, should set interest rates in response to changes in inflation and economic output. The rule is designed to help stabilize an economy by systematically adjusting the central bank’s key policy rate based on current economic conditions. It is designed to take the “guess work” out of establishing interest rate policy.

In John Authers (Bloomberg) blog post today, he shared the following chart:

Calling for a roughly 2.6% Fed Funds rate in an environment of 3% or more core and sticky inflation is not prudent, and it is not supported by history. Furthermore, the potential impact from tariffs will only begin to be felt as most went into effect as of August 1, 2025.

Getting back to the Taylor Rule, Authers also provided an updated graph suggesting that the Fed Funds rate should be higher today. In fact, it should be at a level about 100 bps above the current 4.3% and more than 270 bps above the level that Bessent desires.

Investors would be wise to exit the lower interest rate train before it fuels a significant increase in U.S. rates as inflation once again rises. The impact of higher rates will negatively impact all risk assets. Given that a Cash Flow Matching (CFM) strategy eliminates interest rate risk through the defeasement of benefits and expenses that are future values and thus not interest rate sensitive, one could bring an element of certainty to this very uncertain economic environment before investors get their comeuppance! Don’t wait for the greater inflation to appear, as it might just be too late at that point to get off the lower interest rate train before it plummets into a ravine.

07.16.25
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Really Only One Significant Influence

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

Managing fixed income (bonds) can be challenging as there are a plethora of risks that must be evaluated including, but not limited to, credit, liquidity, maturity/duration, yield, prepayment and reinvestment risk, etc. within the investment-grade universe. But the greatest risk – uncertainty – remains interest rate risk. Who really knows the future direction of rates? As the graph below highlights, U.S. interest rates have moved in long-term secular trends with numerous reversals along the way. Does that mean that we are headed for a protracted period of rising rates similar to what was witnessed from 1953 to 1981 or is this a head fake along the path to historically low rates?

When rates are falling, it is very good for bonds as they not only capture the coupon, but they get some capital appreciation, too. However, when rates rise, it is a very different game. Yes, rising interest rates are very good for pension funds from a liability perspective, as the present value (PV) of those future benefit payments (I.e. liabilities) is reduced, but the asset side may be hurt and not only for bonds but other asset classes as well.

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This is the primary reason why bonds should be used for their cash flows of interest and principal and not as a performance generator. The cash flows should be used to meet monthly benefits and expenses chronologically through a cash flow matching strategy (CFM). Unfortunately, Bonds are frequently used for performance and perhaps diversification benefits while compared to a generic index, such as the BB Aggregate index, which doesn’t reflect the unique characteristics of the pension plan’s liabilities.

U.S. interest rates are presently elevated but aren’t high by historic standards. However, the current level of rates does provide the plan sponsor with a wonderful opportunity to take risk from their traditional asset allocation by defeasing a portion of the plan’s liabilities from next month out as far as the allocation will cover. While the bond portfolio is funding monthly obligations, the remaining assets can just grow unencumbered.

Given the uncertainty regarding the current inflationary environment, betting that U.S. rates will fall making a potential “investment” in bonds more lucrative is nothing short of a crapshoot. Investing in a CFM strategy helps to mitigate interest rate risk as future values are not interest rate sensitive.

07.10.25
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Taylor-Made?

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

The Federal Reserve meeting notes have been published, and there seems to be little appetite among the Fed Governors to reduce U.S. interest rates at the next meeting. They continue to believe that the recently inflated tariffs and current trade policy actions could lead to greater inflationary pressures. These notes do not support the current administration’s push to see the Fed Funds Rate dropped significantly – perhaps as much as 3%.

In a very informative Bloomberg post from this morning, John Authers reminded everyone that President Trump selected Jerome Powell over John Taylor, Stanford University, in 2017 to become Chairman of the Federal Reserve. I must admit that I didn’t remember that being the case, while also not recalling that it is John Taylor who is credited with developing the Taylor Rule in 1993. When I think of famous Taylors, John isn’t at the top of my list. I might have believed that it had something to do with Lawrence Taylor’s dominance on the football field where he “ruled” for 13 Hall of Fame seasons and is considered by many the greatest defensive player in NFL history (yes, I am a Giants’ fan).

So, what is the Taylor Rule? The Taylor Rule is an economic formula that provides guidance on how central banks, such as the Federal Reserve, should set interest rates in response to changes in inflation and economic output. The rule is designed to help stabilize an economy by systematically adjusting the central bank’s key policy rate based on current economic conditions. It is designed to take the “guess work” out of establishing interest rate policy.

The Taylor rule suggests that the central bank should raise interest rates when inflation is above its target (currently 2%) or when GDP is growing faster than its estimated potential (overheating). Conversely, it suggests lowering interest rates when inflation is below target or when GDP is below potential (economy is underperforming). Ironically, President Trump’s dissatisfaction with Jerome Powell’s reluctance to reduce rates given significant economic uncertainty, may have been magnified by John Taylor’s model, which would have had rates higher at this time as reflected in the graph below.

As a reminder, Ryan ALM, Inc. does not forecast interest rates as part of our cash flow matching (CFM) strategy. In fact, the use of CFM to defease pension liabilities (benefits and expenses (B&E)) eliminates interest rate risk once the portfolio is built since future values (B&E) aren’t interest rate sensitive. That said, the currently higher rate environment is great for pension plan sponsors who desire to bring an element of certainty to the management of pensions which tend to live in a very uncertain existence. By funding a CFM portfolio, plan sponsors can ensure that proper liquidity is available each month of the assignment, while providing the residual assets time to grow. There are many other benefits, as well.

Since we don’t know where rates are likely to go, we highly recommend engaging a CFM program sooner rather than later before we find that lower interest rates have caused the potential benefits (cost savings) provided by CFM to fall.

07.08.25
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ARPA Update as of July 3, 2025

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

Welcome to the Summer doldrums. The PBGC’s ARPA activity appears to have been impacted by the holiday-shortened week. We hope that you and your family had a terrific Fourth of July weekend.

There isn’t a whole lot to discuss about last week. There were no applications received as the PBGC’s e-Filing portal remains temporarily closed. No applications were approved or denied, and there were no pension funds looking to be added to a very crowded waiting list.

However, there was one fund, Trucking Employees of North Jersey Welfare Fund, Inc. Pension Plan, that repaid a portion of the Special Financial Assistance (SFA) received earlier. The $7.7 million repayment represents 0.99% of the $774.3 million grant. The Truckers’ fund is the 55th fund to repay a portion of the SFA grant. There are four funds that had no census errors. It was estimated that roughly 60 pension funds had been granted SFA prior to the PBGC’s use of the Social Security Master Death file. In total, $229.4 million has been recouped from $50.9 billion in grants (0.45%).

In other ARPA news, eight funds currently on the waitlist have elected their measurement lock-in date. As a reminder, the measurement date refers to the date on which a plan submits a lock-in application to PBGC. This date is crucial because it sets and permanently establishes the plan’s SFA measurement date and base data for its eventual SFA application, regardless of when the full application is later submitted. Specifically, the lock-in application fixes: 1) the non-SFA and SFA interest rates, 2) the SFA measurement date, and 3) participant census data. Five of the funds chose March 31, 2025, while the other three selected April 30, 2025, as the measurement date for their pension plans.

According to the ARPA legislation, the PBGC is prohibited from accepting initial applications after December 31, 2025. They may receive and review revised applications until December 31, 2026. They currently have about 70 plans on the waitlist, in addition to the 46 that are under review or have been withdrawn. It will take a tremendous effort to process these initial applications prior to the legislation’s deadline.

04.01.25
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The Buying Of Time Can Reap Huge Rewards

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

When we present the list of benefits associated with using Cash Flow Matching (CFM), one of the benefits that we highlight is the buying of time a.k.a. an extended investing horizon. Our pension community tends to fall prey to short-termism despite claiming to be long-term investors. Quarterly observations are presented through the consultants regular performance reviews and managers are often dismissed after a relatively short period of “underperformance”. Actuarial reports tend to be annual which dictate projected contribution expenses. Yet, by extending the investment horizon to something more meaningful like 10-years or more, the probability of achieving the desired outcome is dramatically improved.

I recently played around with some S&P 500 data dating back to 12/31/69 and looked at the return and standard deviation of observations encompassing 1-10-year moving averages and longer periods such as 15-, 20-, 30-, and even 50-year moving averages for the industry’s primary domestic equity benchmark. Living in a one-year timeframe may produce decent annual returns, but is also comes with tremendous volatility. In fact, the average one-year return from 12/69 to 2/25 has been 12.5%, but the annual standard deviation is +/- 16.6%, meaning that 68% of the time your annual return could be +29.1% to -4.1%. Extending the analysis to 2 standard deviations (95% of the observations) means that in 19 out of 20 years the range of results can be as broad as +45.7% to -20.7%.

However, extend out your investing horizon to 10-years, and the average return from 12/69 dips to 11.4%, but the standard deviation collapses to only 5.0% for a much more comfortable range of +16.4% to 6.4%. Extend to 2 standard deviations and you still have a positive observation in 19 out of 20 years at +1.4% as the lower boundary. Extend to 30-years and the volatility craters to only +/-1.2% around an average return of 11.25%.

We, at Ryan ALM, were blessed in 2024 to take on an assignment to cash flow match 30+ years of this plan’s liabilities. We covered all of the projected liability cash flows through 2056 and still had about $8 million in surplus assets, which were invested in two equity funds, that can now just grow and grow and grow since all of the plan’s liquidity needs are being covered by the CFM strategy! So, how important is a long investing runway? Well, if this plan’s surplus assets achieve the average S&P 500 30-year return during the next 30-years, that $8 million will grow to >$195 million.

We often speak with prospects about the importance of bifurcating one’s asset base into two buckets – liquidity and growth. It is critically important that the plan’s liquidity be covered through the asset cash flows of interest and principal produced by bonds since they are the only asset with a known future value. CFM eliminates the need for a cash sweep which would severely reduce the ROA of growth assets. This practice will allow the growth or alpha assets to wade through choppy markets, such as the one we are currently witnessing, without fear that liquidity must be raised to meet benefits at a less than opportune time.

The plan sponsor highlighted above was fortunate to have a well-funded plan, but even plans that are less well-funded need liquidity. Ensuring that benefits and expenses can be met monthly (chronologically) without forcing liquidity that might not naturally exist is critical to the successful operation of a pension plan. CFM can be used over any time frame that the plan sponsor desires or the plan can afford. We believe that extending the investment horizon out to 10-years should be the minimum goal, but every plan is unique and that uniqueness will ultimately drive the decision on the appropriate allocation to CFM.

03.20.25
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FOMC and Powell Deliver Worrying Message

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

I produced a post recently titled, “Parallels to the 1970s?” in which I discussed the challenging economic environment that existed during the 1970s as a result of two oil shocks and some sketchy decision making on the part of the US Federal Reserve. The decade brought us a new economic condition called stagflation, which was a term coined in 1965 by British politician Lain Macleod, but not widely used or recognized until the first oil embargo in 1973. Stagflation is created when slow economic growth and inflation are evident at the same time.

According to the graph above, the FOMC is beginning to worry about stagflation reappearing in our current economy, as they reduced the expectations for GDP growth (the Atlanta Fed’s GDPNow model has Q1’25 growth at -1.8%), while simultaneously forecasting the likelihood of rising inflation. Not good. If you think that the FOMC is being overly cautious, look at the recent inflation forecasts from several other entities. Seems like a pattern to me.

Yet, market participants absorbed the Powell update as being quite positive for both stocks and bonds, as markets rallied soon after the announcement that the FOMC had held rates steady. Why? There is great uncertainty as to the magnitude and impact of tariffs on US trade and economic growth. If inflation does move as forecasted, why would you want to own an active bond strategy? If growth is moderating, and in some cases forecasted to collapse, why would you want to own stocks? Aren’t earnings going to be hurt in an environment of weaker economic activity? Given current valuations, despite the recent pullback, caution should be the name of the game. But, it seems like risk on.

Given the uncertainty, I would want to engage in a strategy, like cash flow matching (CFM), that brought an element of certainty to this very confusing environment. CFM will fully fund the liability cash flows (benefits and expenses) with certainty providing timely and proper liquidity to meet my near-term obligations, so that I was never in a position where I had to force liquidity where natural liquidity wasn’t available. Protecting the funded ratio of my pension plan would be a paramount objective, especially given how far most plans have come to achieve an improved funding status.

I’ve written on many occasions that the nearly four decades decline in rates was the rocket fuel that drove risk assets to incredible heights. It covered up a lot of sins in how pensions operated. If a decline in rates is the only thing that is going to prop up these markets, I doubt that you’ll be pleased in the near-term. Bifurcate your assets into two buckets – liquidity and growth – and buy time for your pension plan to wade through what might be a very challenging market environment. The FOMC was right to hold rates steady. Who knows what their next move will be, but in the meantime don’t bet the ranch that inflation will be corralled anytime soon.