Tag Archives: liquidity

08.20.25
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Hey Ryan ALM – What if…?

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

We hope that you are enjoying a wonderful summer season. Thanks for taking the time to visit our blog, where we’ve now produced >1,650 mostly pension-related posts.

I wanted to share the following email exchange from earlier this week. I received an email at 6:40 pm on Monday from a senior member of the actuarial community who is familiar with our work. He said that he had a client meeting on Wednesday and he was wondering if we could model some potential outcomes should the plan decide to take some risk off the table by engaging a cash flow matching strategy (CFM).

The actuary gave us the “net” liabilities (after contributions) for the next 10-years and then asked two questions. How far out into the future would $200 million in AUM cover? If the client preferred to defease the next 10-years of net liabilities, how much would that cost? We were happy to get this inquiry because we are always willing to be a resource for members of our industry, including plan sponsors, consultants, and actuaries.

We produced two CFM portfolios, which we call the Liability Beta Portfolio™ or LBP, in response to the two questions that had been posed. In the first case, the $200 million in AUM would provide the client with coverage of $225.8 million in future value (FV) liabilities through March 31, 2031 for a total cost of $196.3 million. Trying to defease the next 10-years of liabilities would cost the plan $334.8 million in AUM to defease $430 million in net liabilities.

 $200 million in AUM10-year coverage
End Date3/31/31 7/01/35
FV$225,750,000$430,000,000
PV$196,315,548$334,807,166
YTM  4.52%  4.75%
MDur  2.73 years  4.45 years
Cost Savings $-$29,424,452-$95,192,834
Cost Savings %  13.04%   22.14%
Excess CF$230,375$679,563
RatingBBB+  A-

As we’ve mentioned on many occasions, the annual cost savings to defease liabilities averages roughly 2%/year, but as the maturity of the program lengthens that cost savings becomes greater. We believe that providing the necessary liquidity with certainty is comforting for all involved. Not only is the liquidity available when needed, but the remaining assets not engaged in the CFM program can now grow unencumbered.

If you’d like to see how a CFM program could improve your plan’s liquidity with certainty, just provide us with the forecasted contributions, benefits, and expenses, and we’ll do the rest. Oh, and by the way, we got the analysis completed and to the actuary by 12:30 pm on Tuesday in plenty of time to allow him to prepare for his Wednesday meeting. Don’t be shy. We don’t charge for this review.

07.24.25
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A few Observations from Newport

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

As I mentioned in my ARPA update on Monday, I had the pleasure of attending the Opal Public Fund Forum East in beautiful Newport, RI, and neither the conference nor Newport disappointed. I don’t attend every session during the conference, but I do try to attend most. In all honesty, I can’t listen to another private equity discussion.

As always, there were terrific insights shared by the speakers/moderators, but there were also some points being made that are just wrong. With this being my first day back in the office this week, I don’t have the time to get into great detail regarding some of my concerns about what was shared, but I’ll give you the headline and perhaps link a previous blog post that addressed the issue.

First, DB pension plans are not Ponzi Schemes that need more new participants than retirees to keep those systems well-funded and functioning. Actuaries determine benefits and contributions based on each individual’s unique characteristics. If managed appropriately, systems with fewer new members can function just fine. Yes, plans that find themselves in a negative cash flow situation need to rethink the plan’s asset allocation, but they can continue to serve their participants just fine. Remember: a DB pension plan’s goal is to pay the last benefit payment with the last $. It is not designed to provide an inheritance.

Another topic that was mentioned several times was the U.S. deficit and the impending economic doom as a result. The impact of the U.S. deficit is widely misunderstood. I was fortunate to work with a brilliant individual at Invesco – Charles DuBois – who took the time to educate me on the subject. As a result of his teaching, I now understand that the U.S. has a potential demand problem. Not a debt issue. I wrote a blog post on this subject back in 2017. Please take the time to read anything from Bill Mitchell, Warren Mosler, Stephanie Kelton, and other disciples of MMT.

Lastly, the issue of flows into strategies/asset classes seems not to be understood. The only reason we have cycles in our markets is through the movement of assets into and out of various products/strategies. Too much money chasing too few good ideas creates an environment in which those flows can overwhelm future returns. It is the same for individual asset management firms. Many of the larger asset management firms have become sales organizations in lieu of investment management organizations as they long ago eclipsed the natural capacity of their strategies. In the process, they have arbitraged away their insights which may have provided the basis for some value-added in the past. I believe that too much money is chasing many of the alternative/private strategies. In the process, future returns and liquidity will be negatively impacted. We’ve already seen that within private equity. Is private debt next?

Again, always enjoy seeing friends and industry colleagues at this conference. I continue to learn from so many of the presenters even after 44-years in the industry. However, not everything that you hear will be correct. It is up to you to challenge a lot of the “common wisdom” being shared.

07.09.25
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Problem/Solution: Asset Allocation

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

In this post, Ron continues with his series on identifying solutions to various pension-related problems. This one addresses the issue of asset allocation being driven exclusively from an asset perspective.

Most, if not all asset allocation models are focused on achieving a total return target or hurdle rate… commonly called the ROA (return on assets). This ROA target return is derived from a weighting of the forecasted index benchmark returns for each asset class except for bonds which uses the yield of the index benchmark. These forecasts are generally based on some historical average (i.e. last 20 years or longer) with slight adjustments based on recent observations. As a result, it is common that most pensions have the same or similar ROA. 

This ROA exercise ignores the funded status. It is certainly obvious that a 60% funded plan should have a much higher ROA than a 90% plan. But the balancing item is contributions. If the 60% funded plan would pay more in contributions than the 90% plan (% wise) then it can have a lower ROA. I guess the question is what comes first. And the answer is the ROA with contributions as a byproduct of that ROA target. The actuarial math is whatever the assets don’t fund… contributions will fund.

If the true objective of a pension is to secure and fully fund benefits and expenses (B+E) in a cost-efficient manner with prudent risk, then you would think that liabilities (B+E) would be the focus of asset allocation. NO, liabilities are usually missing in the asset allocation process. Pensions are supposed to be an asset/liability management (ALM) process not a total return process. Ryan ALM recommends the following asset allocation process:

Calculate the cost to fully fund (defease) the B+E of retired lives for the next 10 years chronologically using a cash flow matching (CFM) process with investment grade bonds. CFM will secure and fully fund the retired lives liabilities for the next 10 years. Then calculate the ROA needed to fully fund the residual B+E with the current level of contributions. This is calculated through an asset exhaustion test (AET) which is a GASB requirement as a test of solvency. The difference is GASB requires it on the current estimated ROA before you do this ALM process. Ryan ALM can create this calculated ROA through our AET model. If the calculated ROA is too high, then either you reduce the allocation to the CFM or increase contributions or a little bit of both. If the calculated ROA is low, then increasing the allocation to CFM is appropriate. Running AET iterations can produce the desired or most comfortable asset allocation answer.  

Cash flow matching (CFM) will provide the liquidity and certainty needed to fully fund B+E in a cost-efficient manner with prudent risk. The Ryan ALM model (Liability Beta Portfolio™ or LBP) will reduce funding costs by about 2% per year or roughly 20% for 1-10 years of liabilities. We will use corporate bonds skewed to A/BBB+ issues. According to S&P, investment grade defaults have averaged 0.18% of the IG universe annual for the past 40-years. Fortunately, Ryan ALM has never experienced a bond default in its 21-year history (knock wood).

Assets are a team of liquidity assets (bonds) and growth assets (stocks, etc.) to beat the liability opponent. They should work together in asset allocation to achieve the true pension objective.

For more info on cash flow matching, please contact Russ Kamp, CEO at  rkamp@ryanalm.com

07.07.25
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Don’t Engage in a Cash Sweep – Dividends Matter!

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

We’ve already shared with you the importance of dividends to the long-term return of the S&P 500 by referencing studies conducted by Guinness Global Investors.

According to the Guinness study, which was last updated as of April 2020, the contribution to return of the S&P 500 from dividends and dividends reinvested for 10-year periods since 1940 was a robust 47% down insignificantly from 48% a decade ago. Extending the measurement period to 20 years from 1940 forward highlights an incredible 57% contribution to the total return of the S&P 500 from dividends. Importantly, this study is on the entirety of the S&P 500, not just those companies that pay dividends. If the universe only included dividend payers, this analysis would reveal strikingly greater contributions since roughly 100 S&P 500 companies are not currently paying a dividend.

As if this study isn’t enough to convince you of the importance of dividends to the long-term return of stocks, Glen Eagle Trading put out an email today that referenced a recent Wall Street Journal article, titled “Why Investors Are Right to Love Dividends”. The article highlighted the fact that recent studies show S&P 500 dividend-paying stocks returned 9.2% annually over the past 50 years, which is more than double the 4.3% return of non-dividend payers, with lower volatility. Then there is this study by Ned Davis which broke down the contribution of dividends for the 47-years ending December 21, 2019.

Once again, it becomes abundantly clear why investing in companies paying dividends is a terrific long-term strategy. It also begs the question, why do many plan sponsors and their advisors regularly “sweep” income from their equity managers to meet ongoing benefits and expenses? In doing so, instead of structuring the pension plan to have a liquidity bucket to meet those obligations, this activity diminishes the potential long-term contribution to equities from dividends. As longer-term returns are reduced, greater contributions are needed to make up the shortfall compounding the problem.

Please don’t sweep interest and dividend income or capital distributions for that matter, establish an asset allocation that has a dedicated liquidity bucket that uses cash flow matching to secure and fund ongoing benefits and expenses. The remainder of the assets not deployed in the liquidity bucket go into a growth bucket that benefits from the passage of time.

06.20.25
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Why? – Revisited

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

My 44-year career in the investment industry has been focused on DB pension plans, in roles as both a consultant and an investment manager (I’ve also served as a trustee). I’ve engaged in 000s of conversations related to the management of DB pension plans covering the good, the bad, and even the ugly! I’ve published more than 1,600 mostly pension-related posts on this blog with the specific goal to provide education. I hope that some of my insights have proven useful. Managing a DB pension plan, whether a private, public, or a multiemployer plan is challenging. As a result, I’ve always felt that it was important to challenge the status quo with the aim to help protect and preserve DB pensions for all.

Unfortunately, I continue to think that many aspects of pension management are wrong – sorry. Here are some of the concerns:

  • Why do we have two different accounting standards (FASB and GASB) in the U.S. for valuing pension liabilities?
  • Why does it make sense to value liabilities at a rate (ROA) that can’t be purchased 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 (benefits) 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 some of these observations resonate with you, and 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” (extending the investment horizon) 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 because you’ve SECURED the near-term liquidity needed to fund the promises and just watch the highly uncertain markets unfold knowing that you don’t have to do anything except sleep very well at night.

06.09.25
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Capital Distributions From Private Equity Collapse

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

I recently published a blog titled, Problem – Solution: Liquidity, in which I discussed the impact of pension plan sponsors cobbling together interest, dividends, and capital distributions from their roster of managers, and how that practice was not beneficial, especially during periods of stress in the markets. Well, one of those three legs of the “gotta, but how am I gonna, meet my monthly payment of benefits and expenses”, is really falling short at this time.

Dividends are far lower these days than they once were when equities were perceived to be quite risky. In fact, it wasn’t until 1958 that dividend income fell below interest income from bonds. Couple that phenomenon with the fact that capital distributions have plummeted, and plan sponsors are placing far greater emphasis on capturing interest from bonds than ever before. Yes, thankfully interest rates have risen, but the YTM on the BB Aggregate index is still only in the 4.7% range. That is not likely sufficient to meet monthly payouts, which means that bonds will have to be sold, too. The last thing one should want to do in a rising rate environment is to sell securities at a loss.

However, if the plan sponsor engaged a Cash Flow Matching (CFM) manager in lieu of an active core fixed income manager, the necessary liquidity would be made available each and every month of the assignment, as asset cash flows would be carefully matched against liability cash flows. Both interest and maturing principal would be used to meet those benefits and expenses. No forced selling. No scurrying around to “find” liquidity. A far more secure and certain process.

What if my plan isn’t fully funded. Does it make sense to use CFM? Of course, given that benefits and expenses are paid each month whether your plan is fully invested or not, wouldn’t it make more sense to have those flows covered with certainty? Sure, a poorly funded plan may only be able to use CFM for the next 3-5-years, but that’s the beauty of CFM. It is a dynamic process providing a unique solution for each pension plan. No off the shelf products.

06.02.25
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Problem – Solution: Liquidity

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

Plan Sponsors of defined benefit pension plans don’t have an easy job! The current focus on return/performance and the proliferation of new, and in some cases, complicated and opaque products, make navigating today’s market environment as challenging as it has ever been.

At Ryan ALM, Inc. we want to be our clients’ and prospects’ first call for anything related to de-risking/defeasing pension liabilities. Ryan ALM is a specialty firm focused exclusively on Asset/Liability Management (ALM) and how best to SECURE the pension promise. For those of you who know Ron Ryan and the team, you know that this have been his/our focus for 50+ years. I think that it is safe to say that we’ve learned a thing or two about managing pension liabilities along the way. Have a problem? We may just have the solution. For instance:

Problem – Plan sponsors need liquidity to meet monthly benefits and expense. How is this best achieved since many plan sponsors today cobble together monthly liquidity by taking dividends, interest, and capital distributions from their roster of investment advisors or worse, sell securities to meet the liquidity needs?

Solution – Create an asset allocation framework that has a dedicated liquidity bucket. Instead of having all of the plan’s assets focused on the return on asset (ROA) assumption, bifurcate the assets into two buckets – liquidity and growth. The liquidity bucket will consist of investment grade bonds whose cash flows of interest and principal will be matched against the liability cash flows of benefits and expenses through a sophisticated cost-optimization model. Liquidity will be available from the first month of the assignment as far out as the allocation to this bucket will secure – could be 5-years, 10-years, or longer. In reality, the allocation should be driven by the plan’s funded status. The better the funding, the more one can safely allocate to this strategy. Every plan needs liquidity, so even poorly funded plans should take this approach of having a dedicated liquidity bucket to meet monthly cash flows.

By adopting this framework, a plan sponsor no longer must worry where the liquidity is going to come from, especially for those plans that are in a negative cash flow situation. Also, removing dividend income from your equity managers has a long-term negative effect on the performance of your equity assets. Finally, during periods of market dislocation, a dedicated liquidity bucket will eliminate the need to transact in less than favorable markets further preserving assets.

We’re often asked what percentage of the plan’s assets should be dedicated to the liquidity bucket. As mentioned before, funded status plays an important role, but so does the sponsors ability to contribute, the current asset allocation, and the risk profile of the sponsor. We normally suggest converting the current core fixed income allocation, with all of the interest rate risk, to a cash flow matching (CFM) portfolio that will be used to fund liquidity as needed.

We’ll be producing a Problem – Solution blog on a variety of DB plan topics. Keep an eye out for the next one in the series. Also, if you have a problem, don’t hesitate to reach out to us. We might just have an answer. Don’t delay.

05.02.25
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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
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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
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              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.