Tag Archives: ROA

09.09.25
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A Peer Group?

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

Got an email today that got my heart rate up a little. The gist of the article was related to a particular public pension fund that eclipsed its “benchmark” return for the fiscal year ended June 30, 2025. Good job! However, the article went on to state that they failed to match or exceed the median return of 10.2% for the 108 public pension funds with asset >$1 billion. What a silly concept.

Just as there are no two snowflakes alike, there are no two public pension systems that are the same, even within the same state or city. Each entity has a different set of characteristics including its labor force, plan design, risk tolerance, benefit structure, ability to contribute, and much more. The idea that any plan should be compared to another is not right. Again, it is just silly!

As we’ve discussed hundreds of times, the only thing that should matter for any DB pension plan is that plan’s specific liabilities. The fund has made a promise, and it is that promise that should be the “benchmark” not some made up return on asset (ROA) assumption. How did this fund do versus their liabilities? Well, that relationship was not disclosed – what a shocker!

Interestingly, the ROA wasn’t highlighted either. What was mentioned was the fact that the plan’s returns for 3-, 5-, and 10-years were only 6.2%, 6.6%, and 5.4%, respectively (these are net #s), and conveniently, they just happened to beat their policy benchmark in each period.

I’d be interested to know how the funded ratio/status changed? Did contribution expenses rise or fall? Did they secure any of the promised benefits? Did they have to create another tier for new entrants? Were current participants asked to contribute more, work longer, and perhaps get less?

I am a huge supporter of defined benefit plans provided they are managed appropriately. That starts with knowing the true pension objective and then managing to that goal. Nearly all reporting on public pension plans focuses on returns, returns, returns. When not focusing on returns the reporting will highlight asset allocation shifts. The management of a DB pension plan with a focus on returns only guarantees volatility and not success. I suspect that the 3-, 5-, and 10-year return above failed to meet the expected ROA. As a result, contributions likely escalated. Oh, and this fund uses leverage (???) that gives them a 125% notional exposure on their total assets. I hope that leverage can be removed quickly and in time for the next correction.

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

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.

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!

05.02.25
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Enhancing the Probability of Achieving the ROA

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

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

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

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

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

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.

06.26.15
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“The Truth Will Set You Free”

I continue to be perplexed, befuddled, mystified, and perhaps stumped by the reticence shown by plan sponsors and their consultants in wanting to know the value of the liabilities in their defined benefit plan on an on-going basis!

As a reminder, the defined benefit plan solely exists to provide a predefined benefit to past, present and future employees of the system in a cost effective manner such that contribution costs remain low and stable. Again, the plan exists to meet a liability.  It doesn’t exist to meet a return on asset assumption. Yet, plan sponsors spend 95% of their time worried about the assets in their plan and very little time on how liabilities are being impacted by market forces.

If two pension plans have widely differing fund ratios, say 100% and 60%, should they have the same asset allocation? No, they shouldn’t. They certainly shouldn’t have the same ROA objectives. Why would a plan sponsor of a well funded plan want to live with the volatility associated with an asset allocation designed to support a 60% funded plan?  Plan sponsors should adjust their asset allocation based on the plan’s funded ratio.

A more fully funded plan should have a much more conservative asset allocation than a poorly funded program. However, in order to know what the funded ratio is, one needs a more accurate and current understanding of the value of the plan’s liabilities.  Currently, the only visibility on a plan’s liabilities is through the annual actuarial report, which tends to be provided 4-6 months delinquent. For many plans, they may still only have a view on year-end 2013 liabilities. We can assure you that liability growth has swung wildly in the last 17-18 months, as interest rates fell significantly in 2014, before backing up so far this year.

In a previous blog posting we discussed 2014’s performance for the average pension plan. We highlighted the fact that the average plan slightly underperformed the average ROA, and that based on that performance most sponsors likely felt that it was an okay year.  Unfortunately, that perception would be incorrect as liability growth easily outpaced asset growth in 2014.

In addition, had sponsors taken risk off the table in 1999 when most DB plans were over-funded, they would have adjusted their asset allocations toward fixed income and away from equities. Regrettably, more risk was put into the plans when fixed income allocations were dramatically reduced for fear that the lower yielding environment would reduce a plan’s ability to meet the ROA objective.  As you know, DB plans have missed the last 15 years of a bond bull market, while subjecting those plans to greater equity risk and two major market declines.

Clearly, liabilities and assets have different growth rates. Yet, the industry continues to believe that by achieving the Holy Grail ROA annually that everything will be fine. Unfortunately, that perception is false.

Would you be comfortable playing a football game in which you only knew your score (assets), but had no clue as to what your opponent was doing (liabilities)? How would you adjust your play calling or defense? I suspect that you wouldn’t play any game in which this scenario existed. Then why as an industry are we playing the pension game by only focusing on the assets with no understanding as to how your liabilities are doing?

We can win the pension game, WE NEED TO WIN THE PENSION GAME, but in order to do so we must utilize tools that provide us with all the information that we need to manage these plans more effectively.  Having greater clarity on the liabilities doesn’t have to be a bad thing!  What are you afraid of?

06.22.15
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Pension America – Taking Control Of One’s Destiny

For pension plan participants defined benefit plans (DB) must remain the backbone of the US Retirement Industry

The true objective of a pension plan is to fund liabilities (monthly benefits) in a cost effective manner with reduced risk over time. Unfortunately, it has been nearly impossible to get a true understanding of a plan’s liabilities outside of the actuary’s report, which is received by sponsors and trustees only on an annual basis, at best, and usually many months delinquent.

Fortunately, a plan’s liabilities can now be monitored and reviewed on a monthly basis through a groundbreaking index developed by Ron Ryan and his firm, Ryan ALM – The Custom Liability Index (CLI). The CLI is similar to any index serving the asset side of the equation (S&P 500, Russell 1000, Barclays U.S. Aggregate, etc.), except that the CLI measures your plan’s specific liabilities and not some generic liability stream. This critically important tool calculates the present value, growth rate, term-structure, interest rate sensitivity of your plan’s liabilities, and other important statistics such as, average yield, duration, etc. With a more transparent view of liabilities, a plan can get a truer understanding of the funded ratio / funded status.

The use of the CLI enables plan sponsors, trustees, finance officials, and asset consultants to do a more effective job allocating assets and determining funding requirements (contributions). The return on asset assumption (ROA), which has been the primary objective for most DB plans, should become secondary to a plan’s specific liabilities. Importantly, as the plan’s funded status changes, the plan’s asset allocation should respond accordingly.

Importantly, the CLI is created using readily available information from the plan’s actuary (projected annual benefits and contributions), and it is updated as necessary to reflect plan design changes, COLAs, work force and salary changes, longevity forecasts, etc. In addition, the CLI is an incredibly flexible tool in which multiple views, based on various discount rates, can be created. These views may include the ROA, ASC 715, PPA, GASB 67/68, and market-based rates (risk-free), with and without the impact of contributions.

Why should a DB plan adopt the CLI? As mentioned above, DB plans only exist to fund a benefit that has been promised in the future. As a plan’s financial health changes the asset allocation should be adjusted accordingly (dynamic). Without having the greater transparency provided by the CLI, it is impossible to know when to begin de-risking the plan. You’ve witnessed through the last 15 years the onerous impact of market volatility on the funded status of DB plans and contribution costs. Ryan ALM and KCS can help you reduce the likelihood of a repeat, and very painful, performance.

06.16.15
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NJ’s Pension Battle – We Are All Losers

Last week the state Supreme Court of NJ ruled that the Christie administration had the right to reduce / eliminate the annual required contribution (ARC) for the public pension system, based on a constitutionally established practice that the responsibility to allocate public funds is embedded in the budget process. What appears to be a victory for Christie and NJ tax payers couldn’t be further from the truth!

In a pattern that has been repeated for nearly 20 years, one NJ “leader” after another has failed to make the necessary payments to adequately fund public pensions. By not making the full contribution again this year, we are once again kicking the proverbial can down the road.

Remember folks, the benefit that has been promised to our public fund employees is a LIABILITY that must be met. Not funding that liability only makes it more challenging for the pension plan in the long-term, as the plan loses the benefit of compounding returns / interest on each contribution.  Just think about the economic impact of not funding the $3.1 billion in 2015, especially if the plan would have earned the state’s presumed return on assets over the next 10-20 years.  By deferring that payment, we create a pay as you go system that is much more costly for everyone.

Furthermore, NJ’s pension issue isn’t just a matter of not making the annual required contribution. Why on earth would NJ’s pension officers decide to invest heavily in hedge funds / alternatives at the bottom of the market in 2009?  This decision has increased management costs, while returns on the funds have substantially underperformed cheap equity beta. DB plans have a relative objective (liabilities) and not an absolute objective (ROA). Using absolute product in a relative return environment makes little sense.

Our elected officials are kidding themselves If they think that the pension liability is somehow going away.  By not appropriately funding the liability now, they are only making it more difficult for the state the future.  Think that pensions are taking a big slug of NJ’s budget now, just wait for another 15-20 years.