Tag Archives: Investing

05.08.25
by

Improved Corporate Pension Funding – Milliman

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

Milliman released the results of its 2025 Corporate Pension Funding Study(PFS). The study analyzes pension data for the 100 U.S. public companies with the largest defined benefit (DB) pension plans. Unlike the monthly updates provided by Milliman, this study covers the 2024 fiscal years (FY) for each plan. Milliman has now produced this review for 25 consecutive years.

Here are Milliman’s Key findings from the 2025 annual study, including:

  • The PFS funded percentage increased from 98.5% at the end of FY2023 to 101.1% in FY2024, with the funded status climbing from a $19.9 billion deficit to a $13.8 billion surplus.
  • This is the first surplus for the Milliman 100 companies since 2007.
  • As of FY2024, over half (53) of the plans in the study were funded at 100% or greater; only one plan in the study is funded below 80%. RDK note: This is a significant difference from what we witness in public pension funding studies.
  • Rising U.S. interest rates aren’t all bad, as the funding improvement was driven largely by the 42-basis point increase in the PFS discount rate (from 5.01% to 5.43%)
  • Higher discount rates lowered the projected benefit obligations (PBO) of these plans from $1.34 trillion to $1.24 trillion.
  • While the average return on investments was 3.6% – lower than these plans’ average long-term assumption of 6.5% – the underperformance of assets did not outstrip the PBO improvement. Only 19 of the Milliman 100 companies exceeded their expected returns. 
  • According to Milliman, equities outperformed fixed-income investments for the sixth year in a row. Over the last five years, plans with consistently high allocations to fixed income have underperformed other plans but experienced lower funded ratio volatility. Since 2005, pension plan asset allocations have swung more heavily toward fixed income, away from equity allocations.

“Looking ahead, the economic volatility we’ve seen in 2025 plus the potential for declining interest rates likely means corporate plan sponsors will continue with de-risking strategies – whether that’s through an investment glide-path strategy, lump-sum window, or pension risk transfer,” said Zorast Wadia, co-author of the PFS. “But with about $45 billion of surplus in frozen Milliman 100 plans, there’s also the potential for balance sheet and cash savings by incorporating new defined benefit plan designs.” One can only hope, Zorast.

Final thought: Given the unique shape of today’s Treasury yield curve, duration strategies may be challenged to reduce interest rate risk through an average duration or a few key rates. As a reminder, Cash Flow Matching (CFM) duration matches every month of the assignment. Use CFM for the next 10-years, you have 120 bespoke duration matches.

05.07.25
by

Source Ryan – Question of the Day.

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

We often get comments and questions following the posting of a blog. We welcome the opportunity to exchange ideas with interested readers. Here is a recent comment/question from a LinkedIn.com exchange.

Question: In reviewing the countless reports, reading past agendas, and meeting minutes for these 20 plans, I did not notice any CFM or dedicated fixed income strategies employed by any of them. Perhaps there are a couple that I missed that do, or perhaps some have since embarked on such a strategy. Why wouldn’t public fund plan sponsors use Cash Flow Matching (CFM)?

There really isn’t a reason why they shouldn’t as pointed out by Dan Hougard, Verus, in his recent excellent piece, but unfortunately, they likely haven’t begun to use a strategy that has been used effectively for decades within the insurance industry, by lottery systems, and early on in pension management. Regrettably, plan sponsors must enjoy being on the rollercoaster of returns that only guarantees volatility and not necessarily success. Furthermore, they must get excited about trying to find liquidity each month to meet the promised benefits by scrambling to capture dividend income, bond interest, or capital distributions. If this doesn’t prove to be enough to meet the promises, they then get to liquidate a holding whether it is the right time or not.

In addition, there must be a particular thrill about losing sleep at night during periods of major market disruptions. Otherwise, they’d use CFM in lieu of a core fixed income strategy that rides its own rollercoaster of returns mostly driven by changes in interest rates. Do you know where rates are going? I certainly don’t, but I do know that next month, the month after that, followed by the one after that, and all the way to the end of the coverage period, that my clients will have the liquidity to meet the benefit promises without having to force a sale in an environment that isn’t necessarily providing appropriate liquidity.

The fact that a CFM strategy also eliminates interest rate risk because benefit payments are future values, while also extending the investing horizon for the fund’s growth assets are two additional benefits. See, there really is NO reason not to retain a cash flow matching expert like Ryan ALM, Inc. to bring certainty to the management of pensions that have lived with great uncertainty. In doing so, many plans have had to dramatically increase contributions, alter asset allocation frameworks to take on significantly more risk, while unfortunately asking participants to increase employee contributions, work more years, and receive less at retirement under the guise of pension reform. Let’s stop doing the same old same old and explore the tremendous benefits of Cash Flow Matching. Your plan participants will be incredibly grateful.

05.02.25
by

Enhancing the Probability of Achieving the ROA

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

We are often confronted by plan sponsors and their advisors with the objection of using cash flow matching (CFM) because the “expected return” is lower than the plan’s return on asset assumption (ROA). Given that objection, we often point out that each asset class has its own expected return. The ROA target is developed by weighting each asset class’s exposure by the forecasted return. In the case of the bond allocation, the YTW is used as the target return.

If the plan sponsor has an allocation to “core” fixed income, there is a fairly great probability that our CFM portfolio, which we call the Liability Beta Portfolio (LBP), will outyield the core fixed income allocation thus enhancing the probability of achieving the ROA. This is accomplished through our heavy concentration in A/BBB+ investment grade corporate bonds that will outyield comparable maturity Treasuries and Agencies, which are a big and growing percentage of the Aggregate Index. In most cases, the yield advantage will be 50-100 bps depending on the maturities.

Ron Ryan, Ryan ALM’s Chairman, has produced a very thoughtful research piece on this subject. He also discusses the negative impact on a plan’s ability to achieve the ROA through the practice of sweeping dividend income, interest income, and capital distributions from the plan’s investment programs. Those distributions are better used when reinvested in the investment strategies from which they were derived, as they get reinvested at higher expected growth rates. The CFM program should be the only source to fund net benefits and expenses, as there is no forced selling when benefits and expenses are due.

There is no viable excuse to not use CFM. The benefits from this strategy are plentiful, especially the securing of the promised benefits which is the primary objective for any pension plan. We encourage you to visit RyanALM.com to read the plentiful research on this subject and other aspects of cash flow matching.

05.02.25
by

Opportunity Cost Goes Both Ways

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

I had an interesting conversation at the IFEBP Investment forum. It wasn’t the first time that this topic has been raised and I am willing to state that it won’t be the last. I was discussing the benefits of cash flow matching (CFM) with a trustee who raised concern about locking in the asset / liability match, suggesting that by defeasing a period longer than 3-5-years may lead to “regret” if there had been an opportunity to generate a greater return from those assets used to defease a portion of the liabilities.

Anytime an asset allocation decision is taken, there is always the possibility that some combination of asset classes and products would have produced a greater return in the short-term. However, opportunity cost can easily be opportunity lost. When one engages in a CFM strategy, one does so because they understand that the primary objective in managing a DB pension is to SECURE the promised benefits at a reasonable cost and with prudent risk. Managing a pension fund is not a return game despite the prevailing orthodoxy in our industry.

Why would one not want to secure a portion of the asset base providing the necessary liquidity to meet benefits and expenses? It is so comforting, or it should be, not to have to worry about raising liquidity in challenging markets. At the same time, the CFM strategy is buying time for the alpha (risk) assets to grow unencumbered. We normally suggest that a 10-year CFM be implemented, but that decision is predicated on a number of factors specific to that plan. We can, and have, engaged in assignments shorter than 10-years, and CFM provides the same benefits, even if the cost savings may be less than that provided by a longer assignment.

Furthermore, there is always the question of maintaining the maturity of the assignment (5-, 7-, 10- or more years) once the program is up and running. Plan sponsors must decide if the assignment should be allowed to run out after the initial allocation, be maintained at the same maturity, or extended given improved funding. If markets don’t behave there is no obligation to extend the program. If markets get crushed and the sponsor feels that liquidating the CFM portfolio assets could be used to buy “low” that is available given the liquidity profile of investment grade bonds. We don’t understand why one would want to do that since the matching of assets and liabilities creates certainty, which is missing in traditional pension management.

DB pension plans are critical to the long-term financial security of the participants. Securing the promised benefits reduces the possibility that adverse outcomes don’t result in the fund having to take dramatic action such as additional tiers or worse, the freezing of the plan. CFM stabilizes both the funded status for that portion of the fund and contributions. I would think that getting as much into CFM and reducing the uncertainty of managing the plan given our volatile markets should be an unquestionable goal.

04.29.25
by

Benefits of Cash Flow Matching (CFM)

By: Ronald J. Ryan, CFA, Chairman, Ryan ALM, Inc.

The true objective of a pension is to secure and fund benefits in a cost-efficient manner with prudent risk. This is best accomplished by cash flow matching (CFM). In the 1970s and 1980s it was greatly in vogue and called Dedication. CFM aligns the cash flows of assets to match and fully fund the liability cash flows (benefits + expenses (B+E)) chronologically. Since bonds are the only asset class with the certainty of cash flows (principal and interest), bonds have always been the choice to CFM liability cash flows. The benefits of the Ryan ALM CFM approach are numerous and significant:

Reduces Risk – Risk is best defined as the uncertainty of achieving the objective. CFM will secure the objective of paying benefits with certainty.

    Reduces Cost – The cost to fund future B+E is reduced by about 2% per year (1-10 years = 20%).

    Enhances the ROA – There is a ROA for each asset class. For bonds, it is usually the YTM of a generic bond index. The Ryan ALM CFM is heavily skewed to A/BBB+ corporate bonds and will outyield these bond indexes thereby enhancing the ROA for the bond allocation.

    Mitigates Interest Rate Risk – CFM matches and funds actuarial projections of B+E which are all future values. Importantly, future values are not interest rate sensitive. Future values of B+E should be the focus of a pension objective. Present values are interest rate sensitive but that is not the objective. Since CFM will match the liability cash flows it will have the same or similar duration profile and present value interest rate sensitivity. 

    Eliminates Cash Sweep– Many pensions do a cash sweep of all assets to find the liquidity needed to fund current B+E. CFM will provide this liquidity so there is no need for a cash sweep that harms asset growth. This should enhance the ROA of growth assets whose dividends may have been used to fund current B+E. According to a Guinness Global study of the S&P 500 dating back to 1940, dividends + dividends reinvested accounted for about 49% of the S&P 500 total return for rolling 10-year periods and 57% for 20-year periods. CFM buys time for the growth assets to grow unencumbered.

        Reduces Volatility of Funded Ratio and Contributions – CFM will match and fully fund the liability cash flows chronologically thereby reducing or eliminating any funding ratio volatility for the period it is funding. This should help reduce the volatility of contributions as well.

          Provides Accurate Pension Inflation Hedge – The actuarial projections of B+E include inflation. As a result, CFM not only is the proper liability cash flow hedge but is the only accurate way to hedge pension inflation (benefits, expenses, salary, etc.). Please note that pension inflation is not equal to the CPI but can vary greatly.

          Reduces Pension Expense – For corporations, the present value growth of assets versus the present value growth of liabilities in $s creates a line item called pension expense. Corporations want asset growth to match liability growth in $s to avoid a hit to earnings and use a duration match strategy to hedge. CFM will provide a more accurate duration match since it funds monthly liability cash flows and not an average duration. Public plans do not have this earnings issue.

          Don’t hesitate to reach out to us if you’d like to learn more about how Ryan ALM’s Cash Flow Matching capability can benefit your plan. You can always visit RyanALM.com to get additional research insights . Finally, we are always willing to provide a free analysis. All we need are the projected benefits, expenses, and contributions. The further into the future those projection cover the greater the insights.

              04.28.25
              by

              Verus: “LDI for Public Sponsors”

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

              Dan Hougard, FSA and Associate Director, Actuarial Services at Verus has recently published an excellent thought piece on LDI for public pension plans. In this case, the LDI refers to Cash Flow Matching (CFM). We at Ryan ALM, believe that LDI is the label in which sits both CFM and duration matching strategies. Furthermore, we absolutely agree with Dan’s assessment that public pension plans can benefit in this environment of higher yields despite the accounting differences that may not make the use of CFM obvious.

              As most readers of this blog know, we often criticize public pension accounting (GASB) for pension liabilities that allow the use of the ROA assumption to “discount” liabilities, while corporate/private pension plans use a market-based interest rate (FASB). We applaud Dan for stating that “the purpose of a pension plan’s investment portfolio (assets) is to ensure that the promised benefits (liabilities) can be paid to beneficiaries as they come due”. We at Ryan ALM believe that the primary objective in managing a DB plan is to SECURE the benefits at a reasonable cost and with prudent risk.

              Key highlights from Dan’s research:

              Many plan sponsors approach their investment policy without explicitly focusing on the liabilities

              Because public plans discount liabilities at the ROA the perceived benefit of LDI (CFM) is not as obvious

              Public plans could match longer-duration cashflows combined with “market-based” reporting for a portion of the liabilities – such as all current retirees.

              The lowest risk asset class for pension investors are fixed income securities, as income is used to pay benefits, and securities are held to maturity so there is no interest rate risk.

              During periods of market stress, negative cash flow plans may be forced to sell assets at depressed prices.

              CFM can overcome that challenge by providing the needed cash flow to cover obligations while the return-seeking portfolio grows unencumbered.

              IG credit yields haven’t been this attractive since 2010.

              Public pension portfolios tend to have very uncertain outcomes and carry “tremendous” asset-liability mismatch.

              Finally, CFM “investing can offer considerable value for many pension plans”!

              It is wonderful to see a thoughtful article on this subject. We, at Ryan ALM, often feel as if we are all alone in our quest to protect and preserve defined benefit plans for the masses through cash flow matching, which SECURES the promised benefits at a reasonable cost and with prudent risk. It also allows for a wonderful night’s sleep during periods of excessive uncertainty.

              04.22.25
              by

              WHY?

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

              Why do we have two different accounting standards in the U.S. for valuing pension liabilities?

              Why does it make sense to value liabilities at a rate (ROA) that can’t be used to defease pension liabilities in this interest rate environment?

              Why do we continue to create an asset allocation framework that only guarantees volatility and not success?

              Why do we think that the pension objective is a return objective (ROA) when it is the liabilities that need to be funded and secured?

              Why haven’t we realized that plowing tons of plan assets into an asset class/strategy will negatively impact future returns?

              Why are we willing to pay ridiculous sums of money in asset management fees with no guaranteed outcome?

              Why is liquidity to meet benefits an afterthought until it becomes a major issue?

              Why does it make sense that two plans with wildly different funded ratios have the same ROA?

              Why are plan sponsors willing to live with interest rate risk in the core bond allocations?

              Why do we think that placing <5% in any asset class is going to make a difference on the long-term success of that plan?

              Why do we think that moving small percentages of assets among a variety of strategies is meaningful?

              Why do we think that having a funded ratio of 80% is a successful outcome?

              Why are we incapable of rethinking the management of pensions with the goal to bring an element of certainty to the process, especially given how humans hate uncertainty?

              WHY, WHY, WHY?

              If you are as confused as I am with our current approach to DB pension management, try cash flow matching (CFM) a portion of your plan. With CFM you’ll get a product that SECURES the promised benefits at low cost and with prudent risk. You will have a carefully constructed liquidity bucket to meet benefits and expenses when needed – no forced selling in challenging market environments. Importantly, your investing horizon will be extended for the growth (alpha) assets that haven’t been used to defease liabilities. We know that by buying time one dramatically improves the probability of a successful outcome. Furthermore, your pension plan’s funded status will be stabilized for that portion of the assets that uses CFM. This is a dynamic asset allocation process that should respond to improvement in the plan’s funded status. Lastly, you will be happy to sit back and watch the mayhem in markets unfold knowing that you don’t have to do anything except sleep very well at night.

              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

              04.16.25
              by

              P&I: “Not The Time To Panic” – Frost

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

              There is hardly ever a good time to panic when managing a defined benefit pension plan. No one ever wants to be a forced seller because liquidity is needed and not available. Too often what looks like a well-diversified portfolio suddenly has all assets correlating to 1. I’ve seen that unfold many times during my nearly 44-years in the business.

              It is critically important that the appropriate asset allocation framework be put in place long before one might be tempted to panic. As we’ve mentioned many times before, having all of your eggs (assets) in one basket focused on a return objective (ROA) is NOT the correct approach. Dividing assets among two buckets – liquidity and growth – is the correct approach. It ensures that you have the necessary liquidity to meet benefits and expenses as incurred, and it creates a bridge over uncertain markets by extending the investing horizon, as those growth assets are no longer needed to fund monthly payments.

              Furthermore, the liquidity portfolio should be managed against the plans liabilities from the first month as far out as the allocation to the liquidity bucket will take you. Why manage against the liabilities? First, the only reason the plan exists is to meet a promise given to the participant. The primary objective managing a pension should be to SECURE the promised benefits at a reasonable cost and with prudent risk. Second, a cash bucket, laddered bond portfolio or generic core portfolio is very inefficient. You want to create a portfolio that defeases those promises with certainty. A traditional bond portfolio managed against a generic index is subject to tremendous interest rate risk, and there certainly seems to be a lot of that in the current investing environment.

              The beauty of Cash Flow Matching (CFM) is the fact that bonds (investment grade corporate bonds in our case) are used to defease liabilities for each and every month of the assignment (5-, 10-, 20- or more years). Liabilities are future values (FV) and as such, are not interest rate sensitive. A $1,000 benefit payment next month or any month thereafter is $1,000 whether rates are at 2% or 10%. If one had this structure in place before the market turbulence created by the tariff confusion, one could sleep very comfortably knowing that liquidity was available when needed (no forced selling) and a bridge over trouble waters had been built providing ample time for markets to recover, which they will.

              Yes, now is not the time to panic, but continuing to ride the rollercoaster of performance created by a very inefficient asset allocation structure is not the answer either. Rethink your current asset allocation framework. Allow your current funded status to dictate the allocation to liquidity and growth. The better funded your plan, the less risk you should be taking. DB pension plans need to be protected and preserved. Creating an environment in which only volatility is assured makes little sense. It is time to bring an element of certainty to the management of pensions.

              04.04.25
              by

              Pension Asset Allocation

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

              David Gates, of Bread fame, penned “If” in 1971. One of the more famous lyrics in the song is “if a picture paints a thousand words”. If the average picture paints 1,000 words, the image below paints about 1 million. I believe that the image of a rollercoaster is the perfect metaphor for traditional asset allocation strategies that have pension funds riding markets up and down and up and down until the plan fails. Failure in my opinion is measured by rising contribution expenses, the adoption of multiple tiers requiring employees to contribute more, work longer, and get less, and worse, the migration of new workers to defined contribution offerings, which are an unmitigated disaster for the average American worker.

              As you know, Pension America rode markets up in the ’80s (following a very challenging ’70s) and ’90s, only to have the ’00s drive funded ratios into the ground. The ’10s were very good following the Great Financial Crisis. The ’20s have been a mix of both good (’23 and ’24) and bad markets (’20 and ’22). Who knows where the next 5-years will take us. What I do know is that continuing to ride markets up and down is not working for the average public pension plan. The YTD performance for US equities (S&P 500 -13.2% as of 2:30 pm) coupled with a collapse in the Treasury yield curve is damaging pension funded ratios which had shown nice improvement.

              Riding these markets up and down without trying to install a strategy to mitigate that undesirable path is imprudent. Subjecting the assets to the whims of the market in pursuit of some return target is silly. By installing a discipline (CFM) that secures the promised benefits, supplies the necessary liquidity, buys time for the growth assets, while stabilizing the funded status and contribution expenses seems to be a no-brainer. Yet, plan sponsors have been reluctant to change. Why?

              What is the basis for the reluctance to adopt a modified asset allocation framework that has assets divided into two buckets – liquidity and growth? Do you enjoy the uncertainty of what markets will provide in terms of return? Do you believe that using CFM for a portion of the asset base reduces one’s responsibility? Do you not believe that the primary objective in managing a pension is to secure the promised benefits at a reasonable cost and with prudent risk? The only reason that the DB plan exists is to meet an obligation that has been promised to the plan participant. Like an insurance company or lottery system, why wouldn’t you want to create an investment program that has very little uncertainty?