Tag Archives: Investing

03.07.25
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Reminder: Pension Liabilities are Bond-like

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

Milliman has released the results for their corporate pension index. The Milliman 100 Pension Funding Index (PFI), which tracks the 100 largest U.S. corporate pension plans showed deterioration in the funded ratio dropping from 106.0% to the 104.8% as of month-end. This was the first decline following four consecutive months of improvement. It was the fall in the discount rate from 5.60% to 5.36% during the month that lead to growth in the combined liabilities for the index constituents. As a reminder, pension liabilities (benefit payments) are just like bonds in terms of their interest rate sensitivity. As yields fall, the present value of those future promises escalate.

Milliman reported an asset gain of $18 billion during the month, but that wasn’t nearly enough to offset the growth in liabilities creating a $13 billion decline in funded status. “Gains in fixed income investments helped shore up the Milliman 100 pension assets, but were not strong enough to counter the sharp discount rate decline,” said Zorast Wadia, author of the PFI. Given the uncertain economic and capital markets environments, it is prudent to engage at this time in a strategy to effectively match asset and liability cash flows to reduce the volatility in the funded ratio. Great strides have been made by America’s private pensions. Allowing the assets and liabilities to move independently could result in significant volatility of the funded status leading to greater contribution expenses.

You can view the complete pension funding report here.

03.06.25
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Markets Hate Uncertainty

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

I’ve published many posts on the impact of uncertainty on the well-being of individuals and our capital markets. In neither case are the outcomes positive.

What we are witnessing in the last several trading days is the direct result of policy flip-flopping that is creating abundant uncertainty. As a result, the business environment is deteriorating. One can argue the merits of tariffs, but it is the flip-flopping of these policy decisions that is wreaking havoc. How can a business react to these policies when they change daily, if not hourly.

The impact so far has been to create an environment in which both investment and employment have suffered. Economic uncertainty is currently at record levels only witness during the pandemic. Rarely have we witnessed an environment in which capital expenditures are falling while prices are increasing, but that is exactly what we have today. Regrettably, we are now witnessing expectations for rising input prices, which track consumer goods inflation. It has been more than four decades since we were impacted by stagflation, but we are on the cusp of a repeat last seen in the ’70s. How comfortable are you?

We just got a glimpse of how bad things might become for our economy when the Atlanta Fed published a series of updates driving GDP growth expectations down from a high of +3.9% earlier in the quarter to the current -2.4% published today. The key drivers of this recalibration were trade and consumer spending. The uncertainty isn’t just impacting the economy. As mentioned above, our capital markets don’t like uncertainty either.

I had the opportunity to speak on a panel last week at Opal/LATEC discussing Risk On or Risk Off. At that point I concluded that little had been done to reduce risk within public pension plans, as traditional asset allocation frameworks had not been adjusted in any meaningful way. It isn’t too late to start the process today. Action should be taken to reconfigure the plan’s asset allocation into two buckets – liquidity and growth. The liquidity bucket will provide the necessary cash flow in the near future, while buying time for the growth assets to wade through these troubled waters. Doing nothing subjects the entire asset base to the whims of the markets, and we know how that can turn out.

03.04.25
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A Retirement is Out of the Question for Many – Unfortunately!

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

Is there such a thing as a retirement anymore? According to Fidelity’s Q4 2024 Retirement Analysis, 41% of “retirees” are working, have worked, or are currently seeking work. I would guess that the need to work is strongly correlated to the demise of the DB pension plan.

In other Fidelity news, a big deal was made out of the fact that 527k participants had account balances >$1 million (2.2% of their account holders), but despite those attractive balances, the “average” balance was still only 131k at year-end following two incredible years of growth for the S&P 500 specifically, and equities generally, especially if you rode the tech sector.

Regrettably, there was once again NO mention of the median account balance, which we know is rather anemic. Can the providers of 401(k)s, IRAs, and 403(b)s, please stop highlighting average accounts which are clearly skewed by the much larger balances of a few participants? According to an analysis provided earlier this year by Investopedia, median account balances at Vanguard were dramatically lower than average accounts. As the chart below highlights, there was not a median balance within 40% of the average balance. In fact, those 65-years-old and up had an account balance at 32% of the average balance. I can’t imagine that this ratio would be much different at Fidelity or any other provider of defined contribution accounts.

It is truly unfortunate that a significant percentage of the American workforce will never enjoy the rewards of a dignified retirement. My Dad, who just recently passed at age 95, enjoyed a 34-year retirement as a result of receiving a modest DB pension benefit. That monthly payment coupled with my parents Social Security enabled them to enjoy their golden years. Providing this opportunity for everyone needs to be the goal of our retirement industry.


Note: Fidelity’s 401(k) analysis covers 26,700 corporate DC plans and 24.5 million participants.

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.

02.26.25
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Risk On or Risk Off?

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

I have the pleasure of speaking at the Opal/LATEC conference on Thursday. My panel has been given the topic of Risk On or Risk Off: How Are You Adjusting Your Portfolio, and Which Investment Risks Concern You Most? I think it is an incredibly timely discussion given the many cross-currents in the markets today.

Generally speaking, what is risk? At Ryan ALM, Inc. we would say that risk is the failure to achieve the objective. What is the objective in managing a defined benefit pension plan? We believe that the primary objective is to secure the promised benefits at a reasonable cost and with prudent risk. We don’t believe that it is a return objective.

However, most DB pension systems are NOT focused on securing the promised benefits, but they are engaged in developing an asset allocation framework that cobbles together diversified (overly perhaps) asset classes and investment strategies designed to achieve an annual return (ROA) target that has been established through the contributions of the asset consultant, actuary, board of trustees, and perhaps internal staff, if the plan is of sufficient size to warrant (afford) an internal management capability.

Once that objective has been defined, the goal(s) will be carefully addressed in the plan’s investment policy statement (IPS), which is a road map for the trustees and their advisors to follow. It should be reviewed often to ensure that those goals still reflect the trustees’ wishes. The review should also incorporate an assessment of the current market environment to make sure that the exposures to the various asset classes reflect today’s best thinking.

There are numerous potential risks that must be assessed from an investment standpoint. Some of those include market (beta), credit, liquidity, interest rates, and inflation. For your international managers, currency and geopolitical risk must be addressed. From the pension management standpoint, one must deal with both operational and regulatory risk. Some of these risks carry greater weight, such as market risk, but each can have an impact on the performance of your pension plan.

However, there are going to be times when a risk such as inflation will dominate the investing landscape (see 2022). Understanding where inflation MAY be headed and its potential impact on interest rates and corporate earnings is a critical input into how both bonds and stocks will likely perform in the near-term. Being able to assess these potential risks as a tool to adjust your funds asset allocation could reduce risk and help mitigate the negative impact of significant drawdowns that will impact the plan’s funded status and contribution expenses. Of course, the ability to reduce or increase exposures will depend on the ranges that have been established around asset class exposures (refer to your IPS).

So, where are we today? Is it risk on or risk off as far as the investing community is concerned? It certainly appears to me that most investors continue to take on risk despite extreme equity valuations, sticky, and perhaps worsening inflation, leading to an uncertain path for U.S. interest rates, and geopolitical risk that can be observed in multiple locations from the Middle East, to Ukraine/Russia, and China/Taiwan. The recent change in the administration and policy changes related to the use of tariffs has created uncertainty, if not anxiety, among the investment community.

So, how are you adjusting your portfolio? If your plan is managed similarly to most where all the assets are focused on the ROA, the ability to adjust allocations based on the current environment is likely limited to those ranges that I described above. Also, who can market time? I would suggest that the best way to adjust your portfolio given today’s uncertainty is to adopt an entirely different asset allocation framework. Instead of having all of the assets focused on that ROA objective, bifurcate your asset allocation into liquidity and growth buckets.

By adopting this strategy, liquidity is guaranteed to be available when needed to make those pesky monthly benefit payments. In addition, you’ve just bought time, an extremely important investment tenet, for the remainder of the assets (growth/alpha) to now grow unencumbered. The liquidity bucket will provide a bridge over choppy waters churned up by underperforming markets. Yes, there appears to be significant uncertainty in today’s investment environment. Instead of throwing up your hands and accepting the risks because you have limited means to act, adopt the new asset allocation structure before it is too late to protect your plan’s funded status.

02.18.25
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Terrific Issue Brief from the American Academy of Actuaries

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

An acquaintance of mine shared an issue brief that was produced by the American Academy of Actuaries last April. They Academy describe their organization and role, as follows. “The American Academy of Actuaries is a 20,000-member professional association whose mission is to serve the public and the U.S. actuarial profession. For more than 50 years, the Academy has assisted public policymakers on all levels by providing leadership, objective expertise, and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the United States.”

The brief addressed surplus management for public pension systems. What does it mean and what should be done when a plan is in “surplus”. It is important to understand that a surplus calculation (plan assets – plan liabilities) is a single point in time. Our capital markets (assets) and U.S. interest rates (discounting of liabilities) are constantly changing. A plan that is deemed to be in surplus today could easily fall below 100% the very next day.

The go go decade of the 1990s witnessed public pension’s producing fairly consistent double-digit returns. Instead of locking in these gains through sound surplus management, benefits were often enhanced, contributions trimmed, or both. As a result, once the decade of the ’00s hit and we suffered through two major recessions, the enhancements to the benefits which were contractually protected and the lowered contributions proved tough to reverse.

According to Milliman, they estimate the average public funded ratio at 81.2% (top 100 plans) as of November 30, 2024. This is up substantially from September 30, 2022 when the average funded ratio was roughly 69.8%. But it highlights how much work is still needed to be done. I agree that it is wise to have a surplus management plan should these critically important funds once again achieve a “surplus”. I would hope that the plan is centered on de-risking their traditional asset allocations by using more bonds in a cash flow matching (CFM) strategy to reduce the big swings in funding. Furthermore, it is critically important to secure what has already been promised than to weaken the funded status by enhancing benefits or cutting contributions prematurely.

I’d recommend to everyone involved in pension management that they spend a little time with this report. The demise of DB pension plans in the private sector has created a very uncertain retirement for many of our private sector workforce. Let’s not engage in practices that lead to the collapse of public sector DB plans.

02.13.25
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Nothing Here! Really?

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

Yesterday’s financial news delivered an inflation surprise (0.5% vs. 0.3%), at least to me and the bond market, if not to the U.S. equity market. The Federal reserve had recently announced a likely pause in their rate reduction activity given their concerns about the lack of pace in the inflation march back to its 2% target. This came on the heels of “Street” expectations after the first 0.5% cut in the FFR that there were “likely” to be eight (8!) interest rate cuts by the summer of 2025. Oh, well, the two cuts that we’ve witnessed since that first move last September may be all we get for a while. “Ho hum” replied the U.S. stock market.

The discounting of yesterday’s inflation release is pretty astounding. Like you, I’ve read the financial press and the many emails that have addressed the CPI data 52 ways to Sunday. Much of the commentary proclaims this data point as a one-off event. For instance, the impact of egg price increases (13.8% last month alone) is temporary, as bird flu will be contained shortly. Seasonal factors impacting “sticky-priced” products tend to be announced in January. I guess those increases shouldn’t matter since they only impact the consumer in January. As a reminder, Core inflation (minus food and energy) rose from 3.1% to 3.3% last month. That seems fairly significant, but we are told that the other three core readings were down slightly, so no big deal. Again, really? Each of those core measures are >3% or more than 1% greater than the Fed’s target.

Then there are those that say, “what is significant about the Fed’s 2% inflation objective anyway”? It is an arbitrary target. Well, that may be the case, but for the millions of Americans that are marginally getting by, the difference between 2% and 3% inflation is fairly substantial, especially when we come up with all of these measures that exclude food, energy, housing (shelter), etc. Are you kidding?

As mentioned previously, expectations for a massive cut in interest rates due to the perception that inflation was well contained have shifted dramatically. Just look at the graph above (thanks, Bloomberg). Following the Fed’s first FFR cut of 50 bps, inflation expectations plummeted to below 1.5% for the two-year breakeven. Today those same expectations reveal a nearly 3.5% expectation. Rising inflation will certainly keep the Fed in check at this time.

As mentioned earlier in this post, U.S. equities shrugged off the news as if the impact of higher inflation and interest rates have no impact on publicly traded companies. Given current valuations for U.S. stocks, particularly large cap companies, any inflation shock should send a shiver down the spines of the investing community. Should interest rates rise, bonds will surely become a more exciting investment opportunity, especially for pension plans seeking a ROA in the high 6% area. How crazy are equity valuations? Look at the graph below.

The current CAPE reading has only been greater during the late 1990s and we know what happened as we entered 2000. The bursting of the Technology bubble wasn’t just painful for the Information Technology sector. All stocks took a beating. Should U.S. interest rates rise as a result of the current inflationary environment, there is a reasonable (if not good) chance that equities will get spanked. Why live with this uncertainty? It is time to get out of the game of forecasting economic activity. Why place a bet on the direction of rates? Why let your equity “winnings” run? As a reminder, managing a DB pension plan should be all about SECURING the promised benefits at a reasonable cost and with prudent risk. Is maintaining the status quo prudent?

02.06.25
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Interesting Insights From Ortec Finance

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

PensionAge’s, Paige Perrin, has produced an article that referenced recent research from Ortec Finance. The research, which surveyed senior pension fund executives in the UK, US, the Netherlands, Canada, and the Nordics, found that 77% believe that risk will be elevated, either dramatically or slightly, in 2025. That’s quite the stat. It also follows on reporting from P&I that referenced heightened uncertainty by U.S. plan sponsors. As regular readers of this blog know, I’ve been suggesting to (pleading with) sponsors that they don’t need to live with uncertainty, which is truly uncomfortable.

Among several risks cited were interest rates, inflation, and market volatility. I can’t say that I blame them for their concerns. Who among us are able to adequately forecast rates and inflation? Seems like most fixed income professionals and bond market participants have been forecasting an aggressive move down in rates. Some of these prognosticators were forecasting as many as 7 rate reductions in 2024 and several others in 2025. We didn’t get 2024’s tally. Who knows about 2025 given that inflation has remained fairly sticky.

There is an easy fix for those of you who are concerned about interest rates and inflation. Adopt a cash flow matching (CFM) strategy that will carefully match asset cash flows of interest and principal with liability cash flows (benefits and expenses). Because benefit payments are future values (FVs), they are not interest rate sensitive. Problem solved! Furthermore, the use of CFM extends the investing horizon for the remainder of the fund’s growth assets, so they now have the appropriate time to grow to meet future liabilities.

One other startling stat caught my attention, as “77 per cent of senior pension fund executives believe the increasing number of retirees relative to the number of new hires in defined benefit (DB) plans pose a “significant” or “slight” risk to the DB pensions industry.” That concern is misplaced. I just wrote a post earlier this week on that subject. DB Pension plans are not Ponzi Schemes. They don’t need more depositors than those receiving payments. It is truly frightening that a significant percentage of our senior plan sponsors don’t understand how these plans are actuarial determined and subsequently funded.

Lastly, I nearly jumped out of my chair with excitement when I read the following quotes from Marnix Engels, Ortec Finance’s managing director for global pension risk, who stated the following:

“We believe assessing the risks of both (the bolding is my emphasis) assets and liabilities in combination is crucial to get the full picture on the health of a pension fund,” he said.

“If the impacts of risk drivers are only understood for one side of the funding health equation, then it is possible to misrepresent the overall effect.”

“If a fund is not assessing both assets and liabilities, then it is difficult to conclude the overall impact of interest rate hikes on the plan’s funding ratio.”

YES!!

02.04.25
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DB Pensions Are NOT Ponzi Schemes!

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

I recently stumbled onto an article that was highlighting the impending pension crisis (disaster) that is unfolding in Florida. The author’s primary reason for concern is the fact that there are now more beneficiaries collecting (659,333) than workers paying in (459,428). Briefly mentioned was the fact that the pension system currently has a funded ratio of 83.7% up from 82.4% last year. The fact that there are more recipients than those paying into the system is irrelevant. DB pension systems are not Ponzi Schemes, which in nothing more than a fraudulent vehicle that relies on a continuous influx of new “investors” (substitute plan participants) to pay the existing members of the pool.

A DB pension’s promises (benefit payments) are calculated by actuaries who have an incredibly challenging job of forecasting each individual’s career path (tenure), salary growth, longevity, etc. They do a great job, but they’ll be the first to tell you that they don’t get the individual participant calculations correct, but they do an amazing job of getting the total universe of payments nearly spot on. An acquaintance of mine, who happens to be an excellent actuary shared the following, “pension plans are funded over an active member’s career so that there will be sufficient funds to pay retirement benefits for life.  The funding rules in Florida require contributions to get the plan 100% funded over time.”

Granted, there are states that have not made the annual required contribution, in some cases for decades, and those plans are suffering (poorly funded) as a result. That isn’t the actuary’s issue, but they are left to try to make up the difference by forecasting the need for greater contributions and more significant returns. The payment of contributions comes with little uncertainty, while the reliance on greater investment performance comes with a huge amount of uncertainty over short time frames. I wouldn’t want my pension fund or livelihood (Executive Director, CIO, etc.) dependent on the capital markets.

I frequently hear the concern expressed about negative cash flow plans (i.e. contributions do not fully fund benefits). Why? If pension systems are truly designed based on each participant’s forecasted benefit, mature plans are bound to eventually fall into negative cash flow situations. These plans are designed to pay the last plan participant the last $1 of assets. These pension systems aren’t designed to be an inheritance for some small collection of beneficiaries who make it to the finish line. Importantly, there should be different investment strategies used for plans that are collecting more than they are paying out versus those in negative cash flow situation.

DB pensions are critically important retirement vehicles that need to be protected and preserved. Fabricating a crisis based on an incorrect observation is not helpful. If plan sponsors contribute the necessary amount each year and manage the assets prudently, these pension systems should be perpetual. Neglect the basics and all bets are off!

01.29.25
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What A Challenging Job!

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

I’m going to divert from my normal focus on cash flow matching (CFM) and the defeasing of pension liabilities to write about a subject that I love and one that doesn’t get nearly the air time that it should. I was reminded of this topic at the FPPTA’s latest TLC program in Orlando, which I’ve thoroughly enjoyed participating. If you aren’t aware of the TLC (Thought Leadership Council) this is the FPPTA’s newest advanced educational program for experienced pension trustees. The program is limited to 20-25 trustees who get to roll up their sleeves with highly experienced coaches/mentors. I’m grateful to be included.

On Monday, one of the discussions centered on active managers, particularly US domestic equity managers, who have an incredibly challenging job trying to outperform their respective benchmarks, especially given the concentrated nature of the U.S. equity stock market during the last couple of years. Asset consultants have an even more challenging job trying to figure out which of those active asset managers will actually provide alpha NET of fees. As mentioned during one particular session, there are many aspects of the investment management process that are evaluated by consultants in an attempt to try and identify those few outperformers. These screening criteria may include the depth and consistency of staff, overall experience in managing the strategy, AUM in the product, and of course, performance. However, just because a manager outperformed (provided an excess return vis-a-vis the benchmark) an index at one point doesn’t mean it will happen again. Was the outperformance the result of skill or luck or a little of both?

As I explained to the TLC participants, stock selection factors (indicators or ideas) used to “pick” stocks to be included in the manager’s portfolio have an information content that can be measured. The “value-added” from an idea/factor can ebb and flow depending on a number of factors. Is the “deterioration” in the information coefficient (IC) an indication that the factor is losing it’s forecasting ability or is it just currently out of favor? As investment management firms get larger, the AUM that they control can overwhelm those insights diminishing the forecasting ability of that idea. Other investment management firms have bright people looking for an edge, too. They might just capture the same or similar insights rendering everyone’s use of that idea less robust, which I witnessed first hand in 2007’s quant manager meltdown. Below are two posts that touch on this topic. I hope that my ideas prove useful to you. 

Change Is Good – Really!

and,

If it is That Good, Why Disclose it?

In a previous life, I was the CEO of Invesco’s quant business, which featured roughly 50 incredibly bright team members located both here and abroad and we managed about $30 billion in AUM. During our time together, we developed roughly 55 different strategies (optimizations), mostly U.S. equity mandates for which we had specific return/risk characteristics such as our Structured Core Equity product that was designed to achieve a 2% return for a 3% tracking error or a 0.67 information ratio versus the S&P 500.

We also thought that it was critically important to determine what we believed was the natural capacity of each strategy, as we didn’t want to arbitrage away our own insights. For instance, our Small Value product’s capacity was <$500 million, while many of the larger cap offerings had abundant capacity equal to billions of $s. Trustees should ask their managers what they believe is the natural capacity of the strategy(ies) that they are invested in and how they determined it.

Lastly, I would ask each manager to discuss a stock selection idea (factor / indicator) that they once used, but no longer do and why. Furthermore, I’d ask them to discuss an idea that they are now using to help them choose their portfolio constituents that they might not have been using 3-5 years ago. I’d make sure to understand how often they review every aspect of their investment management process. If that isn’t a normal part of their process, I’d be very concerned. For standing pat means that you are likely falling behind. It will be interesting to hear the replies.

Given how challenging it is to identify value-added managers as a consultant or consistently add value as an investment manager, I’m glad that Ryan ALM focuses on defeasing pension liability cash flows of benefits and expenses with asset cash flows from bonds (principal and interest). There is little uncertainty in our process. It is truly a sleep well at night strategy for all involved.