Tag Archives: Pension Liabilities

12.02.25
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Do the Analysis! Remove the Guess Work.

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

I am truly blessed working for an organization such as Ryan ALM, Inc. I am awed by the folks that I get to work with and the product/strategy that I get to represent. As a reminder, we’ve created a cash flow matching (CFM) strategy that brings an element of certainty to the management of pensions that should be welcomed by pension plan sponsors and their advisors far and wide. What other strategy can inform you on the day that the portfolio is constructed what the performance of that strategy will be for the full-term of the assignment (barring any defaults within investment grade bonds)? Name another strategy that can lay out the liquidity with certainty for each month (chronologically) of that assignment.

Given that liquidity is becoming a challenge as pension plans (mostly public) adopt a more aggressive asset allocation favoring alternative investments, using a CFM strategy that provides ALL the liquidity to meet ongoing benefits and expenses should be a decision that is easily embraced. Yet, our conversations with key decision makers often stall as other parties get involved in the “review”. To this day, I’m not sure what is involved in most of those conversations.

Are they attempting to determine that a traditional core fixed income strategy benchmarked to a generic index such as the BB Aggregate is capable of producing the same outcome? If so, let me tell you that they can’t and it won’t. Any fixed income product that is not managed against your plan’s specific liabilities will not provide the same benefits as CFM. It will be a highly interest rate sensitive product and performance will be driven by changes in interest rates. Do you know where U.S. rates are headed? Furthermore, the liquidity provided by a “core” fixed income strategy is not likely to be sufficient resulting in other investment products needing to be swept of their liquidity (dividends and capital distributions), reducing the potential returns from those strategies.  Such a cash sweep will reduce the ROA of these non-bond investments. Guinness Global’s study of S&P data for the last 85 years has shown that dividends and reinvestment of dividends account for 50% or more of the S&P returns for rolling 10- and 20-year periods dating back to 1940.

Are they trying to determine if the return produced by the CFM mandate will be sufficient to meet the return on asset assumption (ROA)? Could be, but all they need to realize is that the CFM portfolio’s yield will likely be much higher than the YTM of a core fixed income strategy given CFM’s 100% exposure to corporate bonds versus a heavy allocation to lower yielding Treasuries and agencies in an Agg-type portfolio. In this case, the use of a CFM strategy to replace a core fixed income mandate doesn’t impact the overall asset allocation and it certainly doesn’t reduce the fund’s ability to meet the long-term return of the program.

Instead of trying to incorporate all these unknown variables/inputs into the decision, just have Ryan ALM do the analysis. We love to work on projects that help the plan sponsor and their advisors come to sound decisions based on facts. There is no guess work. Importantly, we will construct for FREE multiple CFM portfolios, if necessary, to help frame the decision. Each plan’s liabilities are unique and as such, each CFM portfolio must be built to meet that plan’s unique liability cash flows.

All that is required for us to complete our analysis are the projected liability cash flows of benefits and expenses (contributions, too) as far into the future as possible. The further into the future, the greater the insights that we will create for you. We can use the current allocation to fixed income as the AUM for the analysis or you can choose a different allocation. We will use 100% IG corporates or you can ask us to use either 100% Treasuries/STRIPS or some combination of Treasuries and corporate bonds. We can defease 100% of the plan’s liabilities for a period of time, such as the next 10-years or do a vertical slice of a % of the liabilities, such as 50%, which will allow the CFM program to extend coverage further into the future and benefit from using longer maturity bonds with greater YTMs. Isn’t that exciting!

So, I ask again, why noodle over a bunch of unknowns, when you could have Ryan ALM provide you with a nearly precise evaluation of the benefits of CFM for your pension plan? When you hire other managers in a variety of asset classes, do they provide you with a portfolio up front? One that can give you the return that will be generated over a specific timeframe? No? Not surprised. Oh, and BTW, we provide our investment management services at a significantly lower fee than traditional core fixed income managers and we cap our annual fee once a certain AUM is reached. Stop the guess work. Have us do the work for you. It will make for a much better conversation when considering using CFM. Call me at 201/675-8797 or email me at rkamp@ryanalm.com for your free analysis. I look forward to speaking with you!

09.03.25
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Ryan ALM discount rates: ASC 715 and ASC 842

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

As we enter the final third of 2025 (how is that possible?), actuaries, accounting firms, and pension plan sponsors may begin reviewing their current discount rate relationship(s). If you are one of those, you may want to speak with us about the Ryan ALM discount rates. Since FAS 158 became effective December 15, 2006, Ryan ALM has created a series of discount rates in conformity to then FAS 158 (now ASC 715). Our initial and continuous client is a BIG 4 accounting firm, which hopefully testifies to the integrity of our data.

The benefits of the Ryan ALM ASC 715 Discount Rates are:

  1. Selection – we provide four yield curves: High End Select (top 10% yields), Top 1/3, Above Median (top 50%), Full Universe
  2. Transparency – we provide very detailed info for auditors to assess accuracy and acceptability of our rates
  3. Precision – precise and consistent reflection of current/changing market environment (more maturity range buckets, uses actual bond yields rather than spreads added to Treasury yield curve, no preconceived curve shape/slope bias relative to maturity/duration) than most other discount rate alternatives  
  4. Competitive Cost – our discount rates are quite competitive versus other vendors and can be purchased with a monthly, quarterly, or annual subscription
  5. Flexibility – we react monthly to market environment (downgrades, gaps at certain maturities) with flexibility in model parameters to better reflect changing environment through variable outlier exclusion rules, number of maturity range buckets, and minimum numbers of bonds in each maturity range bucket to better capture observed nuances in the shape of the curve, especially at/near the 30 year maturity point where the market is sparse or nonexistent at times.
  6. Clients – our rates are used by individual plan sponsors, several actuarial and accounting firms including, as stated above, a Big 4 accounting firm
  7. Integration into Ryan ALM products – we use ASC 715 discount rates for our Custom Liability Index and Liability Beta Portfolio™ (cash flow matching) products

Development of our discount rates is the first step in our turnkey system to defease pension liabilities through a cash flow matching (CFM) implementation. Our Custom Liability Index (CLI) and Liability Beta Portfolio (LBP) are the other two critical products in our de-risking process/capability.

In addition to ASC 715, Ryan ALM provides ASC 842 rates, which is the lease accounting standard issued by the Financial Accounting Standards Board (FASB). This standard supersedes ASC 840 and became effective December 15, 2018, for public companies and December 15, 2021, for private companies and nonprofit organizations. Given the widespread prevalence of off-balance sheet leasing activities, the revised lease accounting rules are intended to improve financial reporting and increase transparency and comparability across organizations. ASC 842 will provide management better insight into the true extent of their lease obligations and lead to improvements in capital allocation, budgeting and lease versus buy decisions.

The discount rate to be used is the rate implicit in each lease. This could be difficult and not readily determined. In that case ASC 842 requires the lessee to use the rate that the company borrows at based on their credit rating. Ryan ALM can provide the ASC 842 discount rates based on each lessee borrowing rate or credit rating (i.e. A or BBB). We can provide these discount rates monthly, quarterly or whatever frequency is needed.

We’d be pleased to discuss with you our discount rates or any element of this state-of-the-art capability.

07.08.25
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Milliman: Corporate Pension Funding Up

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

Milliman released its monthly Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans, and they are reporting that the collective funded ratio has risen to 105.1% as of June 30th from 104.9% at the end of May. The driving force behind the improved funding was the powerful 2.6% asset return for the index’s members, which more than offset the growth in pension liabilities as the discount rate fell by 19 bps.

As a result of the significant appreciation during the month, the Milliman PFI plan assets rose by $27 billion to $1.281 trillion during the month from $1.254 trillion at the end of May. The discount rate fell to 5.52% in June, from 5.71% in May and it is now down slights from 5.59% at the beginning of the year. 

“The second quarter of 2025 was a win-win for pensions from both sides of the balance sheet, as market gains of 3.42% drove up plan assets while modest discount rate increases of 2 basis points reduced plan liabilities and resulted in the highest funded ratio since October 2022,” said Zorast Wadia, author of the PFI.

Zorast further stated that “if discount rates decline in the second half of the year, plan sponsors will need to be ever more focused on preserving funded status gains and employing prudent asset-liability management.” We couldn’t agree more. We, at Ryan ALM, believe that the primary goal in managing a DB pension plan is to secure the promised benefits at a reasonable cost and with prudent risk. It is NOT a return objective. Having achieved this level of funding allows plan sponsors and their advisors to significantly de-risk their plans through Cash Flow Matching (CFM), which is a superior duration strategy, as each month of the assignment is duration matched.

06.19.25
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Ryan ALM: Problem/Solution

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

Problem:  Pension Liabilities… MIA

Solution:  Cash Flow Matching (CFM)

The true objective of a pension is to secure and fully fund benefits (and expenses) in a cost-efficient manner with prudent risk. Although funding liabilities (benefits and expenses (B+E)) is the pension objective, it is hard to find liabilities in anything that pertains to pension assets. Asset allocation is more focused on achieving a ROA (return on assets target return), and performance measurement compares assets versus assets, as the asset index benchmarks are void of any liability growth calculations. If you outperform your index benchmark does that mean asset growth exceeded liability growth? Perhaps NOT.

Pension liabilities behave like bonds since their discount rate is most similar to a zero-coupon bond yield curve (especially ASC 715 discount rates which are a AA corporate yield curve). Yes, public and multiemployer pension plans use the ROA as the discount rate to price their liabilities but even then it is not shown in any performance measurement reports. In fact, what shows up in the CAFR annual report is the GASB requirement of an interest rate sensitivity test by moving the discount rate up and down 100 basis points to determine the volatility of the present value of liabilities and the funded ratio. But a total return or growth rate comparison of assets versus liabilities seems to be MIA.

Ryan ALM solves this problem through our asset liability management (ALM) suite of synergistic products:

  1. Custom Liability Index (CLI) – The management of assets should actually start with liabilities. In reality, assets need to fund NET liabilities defined as (benefits + expenses) – contributions. Contributions are the first source to fund B+E. Assets must fund the net or residual. This is never calculated so assets start with little or no knowledge of what there job really is. Moreover, B+E are monthly payments, which are also not calculated, as the actuary provides an annual update. The CLI performs all of these calculations including total return and interest rate sensitivity as monthly reports.
  1. ASC 715 Discount Rates – Ryan ALM is one of very few vendors who provide ASC 715 discount rates, and we’ve done so since FAS 158 was enacted (2006). We provide a zero-coupon yield curve of AA corporate bonds as a monthly excel file for our subscribers including a Big Four accounting firm and several actuarial firms.
  1. Liability Beta Portfolio™ (LBP) – The LBP is the proprietary cash flow matching model of Ryan ALM. The LBP is a portfolio of investment grade bonds whose cash flows match and fully fund the monthly liability cash flows of B+E. Our LBP has many benefits including reducing funding costs by about 2% per year (20% for 1-10 year liabilities). The intrinsic value of bonds is the certainty of their cash flows. That is why bonds have always been chosen as the assets for cash flow matching or dedication since the 1970s. We believe that bonds are not performance or growth assets but liquidity assets. By installing a LBP, pensions can remove a cash sweep from the growth assets, which negatively impact their growth rates. We urge pension plan sponsors to use bonds for their cash flow value and transfer the bond allocation from a total return focus to a liquidity allocation. Moreover, the Ryan ALM LBP product is skewed to A/BBB+ corporate bonds which should outyield the traditional bond manager who is usually managing versus an index which is heavily skewed to Treasuries and higher rated securities that are much lower in yield. The LBP should enhance the probability of achieving the ROA by the extra yield advantage (usually 75 to 100 basis points). The LBP should also reduce the volatility of the funded ratio and contributions. In fact, it should help reduce contribution cost by the extra yield enhancement. 

For more info on the Ryan ALM product line, please contact Russ Kamp at  rkamp@ryanalm.com.

03.07.25
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Reminder: Pension Liabilities are Bond-like

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

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

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

You can view the complete pension funding report here.

09.20.24
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Hall of Famer? She Absolutely is!

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

Markets Group has published an interview that Christine Giordano conducted with Robin Diamonte, CIO, RTX. In addition, Markets Group will hold a ceremony inducting Robin into the Chief Investment Officer Hall of Fame in Boston during the 11th Annual New England Institutional Forum on Sept 25-26. I wish that I could be there to help celebrate Robin’s splendid career.

The interview should be required reading for anyone in the pension arena. She got a wonderful start in this industry working for and with Britt Harris, another outstanding CIO, while they were at Verizon (I knew them when it was GTE).

Here are a couple of quotes that truly speak to her knowledge of the space. They just so happen to echo what we at Ryan ALM, Inc. have been espousing for decades. “It’s about understanding what the focus is or the mission of your group. Back in the 1990s, chief investment officers and investment teams really didn’t understand what liabilities were. All we were really is a moneymaker for the company. We provided great returns. We outperformed our liabilities.” There are still a lot of plans that pay little heed to the promises that have been given, focusing instead on achieving the ROA, which even if attained, doesn’t guarantee success.

Robin added, “Then over time, we had a couple of crises. We had the tech bubble bust, and then the global financial crisis. We had perfect storms during those periods where equity markets went down and interest rates went down at the same time. Many of the corporations found that their funded status went from well over 100% down into the 70s, and that happened with UTC (United Technologies).” Yes, markets can behave like rollercoasters leading to significant swings in the plan’s funded status and contribution expenses.

She continued, “I think it was the immediate realization of our mission is not to get great investment returns, our mission is to get great investment returns, but also understand what our liabilities were.” Yes, you, as a plan sponsors, have made a promise and we believe that the promise is what should drive asset allocation decisions and not some ROA that is often chosen for other reasons.

That realization lead her to this conclusion, “the mission at that point when our funded level was only 70% was, “Let’s fill in the gap so that we get to 100% or 110% or whatever is needed. We do that in a way that we’re not taking a lot of risk versus our liabilities.” Absolutely right! That is why she is a Hall of Famer in my book.

I also want to commend her for the outstanding work she did as a member of the PBGC’s Advisory Committee. She was instrumental in bringing ALM/LDI insights to the PBGC which has helped them to greatly improve this organizations balance sheet. Congratulations, Robin. There is no finer plan sponsor to induct into the CIO hall of fame than you.

10.02.15
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Weakening Jobs Growth To Further Pressure DB Plans

Given the news from this morning regarding US job growth (only 142,000 jobs added and revisions down in the previous two months), it would not surprise us to see US interest rates continue to fall.  If in fact this happens, DB plans’ funded ratios and funded status will continue to weaken. As we’ve reported on numerous occasions, plan liabilities, although discounted at the ROA, do not grow at the same rate as assets.

Liability growth has far outpaced asset growth in the last 15 years, and the asset allocation mismatch that exists between a plan’s assets and liabilities continues to be dramatic.  With most everyone expecting interest rates to rise, fixed income exposures have been reduced and bond durations shortened. A combination that continues to weigh on plan performance.

We continue to believe that weak global growth will keep interest rates low for the foreseeable future, and as such, fixed income exposures should be increased and reconfigured to meet near-term liabilities.  I will be discussing this concept / strategy at the upcoming FPPTA conference on Tuesday in Naples, FL.

Plans continue to focus almost exclusively on their fund’s ROA, but the liability side of the equation needs some attention, too, especially given the prospects for continuing global economic weakness.  In this environment, a plan will not close it’s funding gap through outperformance relative to its ROA.