Tag Archives: Pension Liabilities

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.