Tag Archives: Liabilities

10.15.25
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MV versus FV

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

There seems to be abundant confusion within certain segments of the pension industry regarding the purpose and accounting (performance) of a Cash Flow Matching (CFM) portfolio on a monthly basis. Traditional monthly reports focus on the present value (PV) of assets in marking those assets to month-end prices. However, when utilizing a CFM strategy, one is hoping to defease (secure) promised benefits which are a future value (FV). As a reminder, FVs are not interest rate sensitive. The movement in monthly prices become irrelevant.

If pension plan A owes a participant $1,000 next month or 10-years from now, that promise is $1,000 whether interest rates are at 2% or 8%. However, when converting that FV benefit into a PV using today’s interest rates, one can “lock in” the relationship between assets and liabilities (benefit payment) no matter which way rates go. To accomplish this objective, a CFM portfolio will match those projected liabilities through an optimization process that matches principal, interest, and any reinvested income from bonds to those monthly promises. The allocation to the CFM strategy will determine the length of the mandate (coverage period).

Given the fact that the FV relationship is secured, providing plan sponsors with the only element of certainty within a pension fund, does it really make any sense to mark those bonds used to defease liabilities to market each month? Absolutely, NOT! The only concern one should have in using a CFM strategy is a bond default, which is extremely rare within the investment grade universe (from AAA to BBB-) of bonds. In fact, according to a recent study by S&P, the rate of defaults within the IG universe is only 0.18% annually for the last 40-years or roughly 2/1,000 bonds.

A CFM portfolio must reflect the actuaries latest forecast for projected benefits (and expenses), which means that perhaps once per year a small adjustment must be made to the portfolio. However, most pension plans receive annual contributions which can and should be used to make those modest adjustments minimizing turnover. As a result, most CFM strategies will purchase bonds at the inception of a mandate and hold those same issues until they mature at par. This low turnover locks in the cost reduction or difference in the PV vs. FV of the liabilities from day 1 of the mandate. There is no other strategy that can provide this level of certainty.

To get away from needing or wanting to mark all the plan’s assets to market each month, segregate the CFM assets from the balance of the plan’s assets. This segregation of assets mirrors our recommendation that a pension plan should bifurcate a plan’s asset allocation into two buckets: liquidity and growth. In this case, the CFM portfolio is the liquidity bucket and the remaining assets are the growth or alpha assets. If done correctly, the CFM portfolio will make all the necessary monthly distributions (benefits and expenses), while the alpha assets can just grow unencumbered. It is a very clean separation of the assets by function.

Yes, bond prices move every minute of every day that markets are open. If your bond allocation is being compared to a generic bond index such as the Aggregate index, then calculating a MV monthly return makes sense given that the market value of those assets changes continuously. But if a CFM strategy can secure the cost reduction to fund FVs on day 1, should a changing MV really bother you? Again, NO. You should be quite pleased that a segment of your portfolio has been secured. As the pension plan’s funded status improves, a further allocation should be made to the CFM mandate securing more of the promised benefits. This is a dynamic and responsive asset allocation approach driven by the funded status and not some arbitrary return on asset (ROA) target.

I encourage you to reach out to me, if you’d appreciate the opportunity to discuss this concept in more detail.

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.

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.

08.22.25
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Confusing the Purpose!

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

There recently appeared in my inbox an article from an investment advisory firm discussing Cash Flow Driven Investing (CDI). Given that CDI, or as we call it Cash Flow Matching (CFM), is our only investment strategy, I absorb as much info from “competitors” as I can.

The initial point in the article’s summary read “There is no one-size-fits-all approach for cashflow driven investment strategies.” We concur, as each client’s liabilities are unique to them. Like snowflakes, there are no two pension plan liability streams that are the same. As such, each CDI/CFM portfolio needs to reflect those unique cash flows.

The second point in their summary of key points is where we would depart in our approach. They stated: “While most will have a core allocation to investment grade credit, the broader design can vary greatly to reflect individual requirements.” This is where I believe that the purpose in using CFM is confused and unnecessarily complicated. CFM should be used to defease a plan’s net outflows with certainty. At Ryan ALM, Inc. we use 100% of the bond assets to accurately match the liability cash flows most often through the use of investment-grade corporate bonds. Furthermore, It is a strategy that will reduce risk, while stabilizing the plan’s funded status and contribution expenses associated with the portion of the liability cash flows that is defeased. It is not an alpha generator, although the use of corporate bonds will provide an excess yield relative to Treasuries and STRIPS, providing some alpha.

As we’ve discussed many times in this blog, traditional asset allocation approaches having all of the plan’s assets focused on a return objective is inappropriate for the pension objective to secure and fully fund benefits in a cost-efficient manner despite overwhelming use. We continue to espouse the bifurcation of the assets into liquidity and growth buckets. The liquidity bucket should be an investment-grade corporate bond portfolio that cash flow matches the liability cash flows chronologically from the next month as far out as the allocation will cover. The remaining assets are the growth or alpha assets that now have time to grow unencumbered.

Why take risk in the CFM portfolio by adding emerging markets debt, high yield, and especially illiquid assets, when the purpose of the portfolio is to create certainty and liquidity to meet ongoing benefits and expenses? If the use of those other assets is deemed appropriate, include them in the alpha bucket. As a reminder, CFM has been used successfully for many decades. Plan sponsors live with great uncertainty every day, as markets are constantly moving. Why not embrace a strategy that gives you a level of certainty not available in other strategies? Use riskier strategies when they have time to wade through potentially choppy markets. CFM provides such a bridge. If you give most investment strategies a 10-year time horizon without the need to provide liquidity, you dramatically enhance the probability of achieving the desired or expected outcome.

Unfortunately, we have a tendency in our industry to over-complicate the management of pensions. Using a CFM strategy focused on the plan’s liabilities, and not the ROA, brings the management of pensions back to its roots. Take risks when you have the necessary time. Focusing the assets on the ROA creates a situation in which one or more assets may have to be traded (sold) in order to meet the required outflows. Those trades might have to be done in environments in which natural liquidity does not exist.

05.13.25
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My Wish List as a Pension Trustee

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

I’ve been a trustee for a non-profit’s foundation fund. I haven’t been a Trustee for a defined benefit pension plan, but I’ve spent nearly 44-years in the pension industry as both a consultant and investment advisor working with many plan sponsors of varying sizes and challenges. As anyone who follows this blog knows, Ryan ALM, Inc. and I are huge advocates for DB pension plans. We believe that it is critical for the success of our retirement industry that DB pension plans remain at the core of everyone’s retirement preparedness. Regrettably, that is becoming less likely for most. However, if today I were a trustee/plan sponsor of a DB pension plan, private, public, or multiemployer, this would be my wish list:

  • I would like to have more CERTAINTY in managing my DB pension fund, since all my fund’s investments are subject to the whims of the markets.
  • I would like to have the necessary LIQUIDITY to meet my plan’s benefits every month without having to force a sale of a security or sweep income from higher growth strategies (dividends and capital distributions) that serve my fund better if they are reinvested.
  • I would like to have a longer investing HORIZON for my growth (alpha) assets, so that the probability of achieving the strategy’s desired outcome is greatly enhanced.
  • I don’t want to have to guess where interest rates are going, which impact both assets (bond strategies) and liabilities (promised benefits). Bonds should be used for their CASH FLOWS of interest and principal at maturity.
  • I don’t want to pay high fees without the promise of delivery.
  • I’d like to have a more stable funded status/funded ratio.
  • I want annual contribution expenses to be more consistent, so that those who fund my plan continue to support the mission.
  • I want my pension fund to perform in line with expectations so that I don’t have to establish multiple tiers that disadvantage a subset of my fund’s participants.
  • I want my fund to be sustainable, even though I might believe it is perpetual.

Are My Desired Outcomes Unreasonable?

Absolutely, not! However, there is only one way to my wish list. I must retain a Cash Flow Matching (CFM) strategy, that when implemented will provide the necessary liquidity, extend the investing horizon, eliminate interest rate risk, bring an element of certainty to a very uncertain process, AND stabilize both contribution expenses and the funded status for that portion of the portfolio using CFM.

Is there another strategy outside of an expensive annuity that can create similar outcomes? NO! I believe that the primary objective in managing a DB plan is to SECURE the promised benefits at a reasonable (low) cost and with prudent risk. CFM does that. Striving to achieve a return on asset (ROA) through various fixed income, equity, and alternative strategies comes with great uncertainty and volatility.  The proverbial rollercoaster of outcomes. The CFM allocation should be driven by my plan’s funded status. The higher the funded status, the greater the allocation to CFM, and the more certainty my fund will enjoy.

I believe that since every plan needs liquidity, EVERY DB pension fund should use CFM as the core holding. I want to sleep well at night, and I believe that CFM provides me with that opportunity. What do you think?

05.09.25
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The Benefits of Using Multiple Discount Rates in a Public Pension Plan

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

Public pension plan sponsors frequently ask us about the impact of investing in a cash flow matching (CFM) strategy on the fund’s ability to achieve the ROA, which is also the discount rate used to value the plan’s liabilities under GASB accounting. As we’ve discussed many times, the plan’s ROA is actually a blend of ROAs with an “expected” return target assigned to each asset class, except for bonds, which uses the YTM of the index benchmark, and then those forecasts are averaged based on the weight of the exposure within the total asset base. So, despite the fact that GASB requires a single rate to discount the plan’s liabilities, multiple ROA targets have been used for years.

We believe that this process can, and should, be refined even more. We believe that the ROA target should be focused on the plan’s liabilities and not just the assets. With a liability focus one gets the following benefits when using multiple discount rates, including:

  • Risk Matching: Applying different discount rates to different asset or liability segments can better reflect the varying risk profiles of those segments. For example, using a lower, market-based rate for secured benefits (through a CFM process) and a higher rate for more uncertain, investment-backed benefits can align present value (PV) calculations more closely with the actual risks being taken within the fund.
  • Improved Accuracy: Multiple rates may provide a more accurate estimate of liabilities, especially when plan assets are invested in a mix of instruments with different risk and return characteristics.
  • Transparency in Funding Status: By separating liabilities based on funding source or risk, stakeholders get a clearer picture of which obligations are well-secured (those that are defeased through CFM) and which may be more vulnerable to market fluctuations (the growth assets).
  • Policy Flexibility: Using a blended discount rate can help manage the transition when lowering the overall discount rate, avoiding sudden shocks to contribution requirements.

We often discuss the need to bring an element of certainty to the management of DB pension plans, which have embraced uncertainty for years. Bifurcating your plans liabilities (retired lives and actives) and assets (liquidity and growth) into two buckets and applying different discount rates to each brings greater certainty to the management of a pension plan. There is no longer any guessing as to how your liquidity bucket will perform, as the asset cash flows are matched to liability cash flows with certainty and the fund’s cost savings and return are both know on the day that the portfolio is constructed. How wonderful!

04.03.25
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An Ugly Day For Pension America

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

Yes, today’s ugliness in the markets is only one day and how many times have we heard or read that you can’t market time or if you miss just the best performing 25-, 50-, or 100-days in the stock market, your return will resemble that of cash or bonds? Those facts are mostly correct. We may not be able to market time, but we can certainly put in place an asset allocation framework that gets DB pension plans off the rollercoaster of performance. We can construct an asset allocation that provides the necessary liquidity when markets may not be able to naturally. An asset allocation that buys time for the growth asset to wade through troubled markets. A framework that secures the promised benefits and stabilizes both funded ratios and contribution expenses for that portion of the fund that has adopted a new strategy.

Yes, today is only one day, but the impact can be significantly negative. See, it isn’t just the loss that has to be made up, as pension plans are counting on a roughly 7% return (ROA) for the year. Every negative event pushes that target further away. Equity values are getting whacked and today’s market activity is just exacerbating the already weak start to the year. While equity markets are falling, U.S. interest rates are down precipitously. The U.S. 10-year Treasury note’s yield is down just about 0.8% since early in January. As a reminder, the average duration of a DB pension is about 12 years or twice the duration of the Bloomberg Barclays Aggregate Index, which is the benchmark for most core fixed income mandates. So, your bond portfolios may be seeing some appreciation today and since the start of 2025, but those portfolios are not growing nearly as fast as your plan’s liabilities, which have grown by about 10.6% (12 year duration x 0.8% + income of 1.0% = 10.6%). As a result, funded ratios are taking a hit.

I wrote this piece back on March 4th reminding everyone that the uncertainty around tariffs and other factors should inspire a course change, an asset allocation rethink. I suspect that it didn’t. So, one can just assume that markets will come back and the underperformance will not have impacted the pension plan, but that just isn’t true. In many cases, equity market corrections take years to recover from and in the process contribution expenses rise, and in some cases dramatically so.

Adopting a new asset allocation framework doesn’t mean changing the entire portfolio. A restructuring can be as simple as converting your highly interest rate sensitive core bond portfolio into a cash flow matching (CFM) portfolio that secures the promised benefits from next month out as far as the allocation can go. In the process you will have improved the plan’s liquidity, extended the investing horizon for the alpha assets, stabilized the funded status for that segment of your plan, and mitigated interest rate risk, as those benefit payments are future values which aren’t interest rate sensitive. You’ll sleep very well once adopted.

11.08.24
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Another Inconsistency

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

The US pension industry is so critically important for the financial future of so many American workers. The defined benefit coverage is clearly not what it once was when more than 40% of workers were covered by traditional pension. There were a number of factors that led to the significantly reduced role of DB plans as the primary retirement vehicle. At Ryan ALM we often point out inconsistencies and head-scratching activities that have contributed to this troubling trend. One of the principal issues has been the conflict in accounting rules between GASB (public plans) and FASB (private plans). We frequently highlight these inconsistencies in our quarterly Pension Monitor updates.

The most striking difference between these two organizations is in the accounting for pension liabilities. Private plans use a AA corporate yield curve to value future liabilities, while public plans use the return on asset assumption (ROA) as if assets and liabilities move in lockstep (same growth rate) with one another. As a reminder, liabilities are bond-like in nature and their present values move with interest rates. I mention this relationship once more given market action during October.

Milliman has once again produced the results for the Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest US corporate pension plans (thank goodness that there are still 100 to be found). During the month of October, investment returns produced a -2.53% result. Given similar asset allocations, it is likely that investment results will prove to be negative for public plans, too. We’ll get that update later in the month from Milliman, also. Despite the negative performance result for the PFI members, their collective Funded Ratio improved from 102.5% at the end of September to 103.4% by the end of October.

The improved funding had everything to do with the change in the value of the PFI’s collective liabilities, as US rates rose significantly creating a -0.35%  liability growth rate and a discount rate now at 5.31%. This was the first increase in the discount rate in six months according to Zorast Wadia, author of the PFI. The upward move in the discount rate created a -$51 billion reduction in the projected benefit obligation of the PFI members. That was more than enough to overcome the -$41 billion reduction in assets.

What do you think will happen in public fund land? Well, given weak markets, asset levels for Milliman’s public fund index will likely fall. Given that the discount rate for public pension systems is the ROA, there will be no change in the present value of public pension plans’ future benefit obligations (silly). As a result, instead of witnessing an improvement in the collective funded status of public pensions, we will witness a deterioration. The inconsistency is startling!

10.31.24
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Pension ROA – Trick or Treat?

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

Ron brings to you today a Halloween Special titled, Pension ROA – Trick or Treat? In this research piece, Ron explores how the return on asset assumption (ROA) is calculated and some of the misconceptions associated with targeting this return as the primary objective of pension management. One of those misunderstandings has to do with the expectation for each asset class used in the plan. An asset class, such as fixed income, is only asked to earn the ROA assigned to It by using their index benchmark as the target return proxy. They are NOT required to earn the total pension fund ROA assumption (@ 6.75% to 7% today). This is an important fact to remember in asset allocation.

As always, we encourage your comments and questions. Please don’t hesitate to reach out to us. Have a wonderful Halloween with your family and friends.

09.26.24
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Must We Continue to Just Shift Deck Chairs on the Titanic?

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

You may not have been following Ryan ALM’s blog through the many years that I have been producing posts in which I’ve touched on this subject. We at Ryan ALM continue to question the logic of focusing on the return on asset assumption (ROA) as the pension plan’s primary objective.  We especially challenge the notion that shifting a couple of percent from one asset class to another produces meaningful results for the pension system’s asset allocation and long-term funding success.

Day after day, I read, as I’m sure that you do, articles, blogs, emails, etc. highlighting a new product or twist to an existing one that will just “rock your world” and assist you on the road to achieving the return on asset (ROA) assumption. It doesn’t matter whether your plan is a public fund, multiemployer pension, or a private plan, the continued focus on the ROA as the primary objective for both plan sponsors and their asset consultants is leading everyone down the wrong path. You see, most of the retirement community has been sold a bag of rotten goods claiming that a plan needs to generate the ROA, or it will not meet its funding goals. I say, “Hogwash”! I’d actually like to say something else, but you get my drift.

So, when valuations for most asset classes seem to be stretched, as they do today, where does a pension plan go to allocate their plan’s assets? Well, this “issue” has plan sponsors once again scratching their collective heads and doing the Curly shuffle.  You see, they have once again through the presumed support of their consultants, begun to approach asset allocation as nothing more than rearranging the deck chairs on the Titanic.

Despite tremendous gains from both equity and fixed income bull markets, these plans are willing to “let it ride” instead of altering their approach to possibly reduce risk, stabilize the funded status, and moderate contribution expense. Can you believe that one of the country’s largest public plans has recently decided (I’m sure that it took a long time, too) to roll back fixed income exposure by 2% and equity exposure by 1% from 55% to 54%?  Are you kidding me? Is that truly meaningful or heroic?

Please note that generating a return commensurate with the ROA is not going to guarantee success. Furthermore, since most public pension plans are currently underfunded on an actuarial basis (let alone one based on market values) meeting this ROA objective will only further exacerbate the UAAL, as the funded status continues to slip. You see, if your plan is 80% funded, and that is the “average” funded ratio based on Milliman’s latest work, you need to outperform your plan’s 7% ROA objective by 1.75% in order to maintain the current funded status. Here’s a simple example as a proof statement:

Assets = $80   Liabilities = $100   ROA = 7.00%   Asset growth = $5.60   Liability growth = $7.00

In order for asset growth = $7.00, assets would need a 8.75% ROA

Given that reality, these plans don’t need the status quo approach that has been tried for decades. Real pension reform must be implemented before these plans are no longer sustainable, despite the claim that they are perpetual.  As an industry, we have an obligation to ensure the promised benefits are there when needed. Doing the same old, same old places our ability to meet this responsibility in jeopardy. If valuations are truly stretched, don’t leave your allocations basically stagnant. Take the opportunity to try something truly unique.

It is time to approach asset allocation with a renewed focus. Instead of having all of your plan’s assets tied to achieving the ROA, divide them into two buckets – liquidity and growth. The liquidity bucket will utilize a cash flow matching (CFM) strategy to ensure that monthly payments of benefits and expenses (B+E) are available, as needed, chronologically. The asset cash flows from the CFM strategy will be carefully matched against the liability cash flows of B+E providing the necessary liquidity. This provides the growth bucket (all non-bond assets) with an extended investing horizon, and we all know how important a long time horizon is for investing. Importantly, the growth assets will be used down the road to meet future pension liabilities and not in the short-term to meet liquidity needs. The practice of a cash sweep to meet ongoing liquidity has negatively impacted long-term returns for many pension systems.  Let bonds fund B+E so the growth assets can grow unencumbered.

Focusing on products and minor asset class shifts will waste a lot of your time and not produce the results that our pension plans need. Ensuring the appropriate funding to meet the promises given to the plan participant takes real reform. It starts with eliminating the single focus on the ROA. Pension plan liabilities need to be invited to the asset allocation dance, since paying a benefit is the only reason that the fund exists in the first place.