Tag Archives: Ryan ALM

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.

              04.25.25
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              A Call for Pension Reform – Five Years Later

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

              On March 25, 2020, I produced a post titled, “Why Pension Reform is Absolutely Necessary“. A few of you may recall that blog. I penned the post in reaction to a series of statistics that my friend John A. produced. John is a retired Teamster and an incredibly important driver behind efforts to reinstate benefits that had been cut under MPRA. John’s analysis was based on a survey that he conducted on multiemployer plans that had roughly 43,000 plan participants impacted by that misguided legislation. That universe of participants would grow to more than 75,000. What he discovered through his polling and outreach was shocking!

              Their benefit reductions amounted to nearly $34,000,000 / month.  (That is a ton of lost economic activity.)

              95% were not able to work.

              72% were providing primary care for an ailing loved one.

              65% were not able to maintain healthcare insurance.

              60% had lost their home.

              55% were forced to file for bankruptcy.

              80% were living benefit check to benefit check.

              100% of the PBGC maximum benefit payout was inadequate ($12,870 for a retiree with 30-years of work).

              50% of the retirees were U.S. service veterans.

              Shocked? I certainly was and continue to be that our government allowed the benefits to be cut for hard working American workers who rightfully earned them through years of employment.

              Where are we today? Fortunately, the got the passage of ARPA pension reform (originally referred to as the Butch Lewis Act) which was signed into law by President Biden in March 2021. Responsibility to implement the legislation fell to the Pension Benefit Guaranty Corporation (PBGC). In my original blog post, I referred to a potential universe of 125 multiemployer plans that might be eligible for Special Financial Assistance (SFA). That list would eventually become 204 plans (see below).

              I’m extremely pleased to announce that 119 funds of the 204 potential recipients have received more than $71.6 billion in SFA and interest supporting the retirements of 1,555,460 plan participants. Awesome! There is still much to do, and hopefully, the sponsors of these funds will prove to be good stewards of the grant $s by conservatively investing the SFA and reserving the risk taking for the legacy assets that have time to wade through challenging markets.

              What an incredible accomplishment! So many folks would have been subject to very uncertain futures. The securing of their benefits goes a long way to allowing them to enjoy their retirement years. Unfortunately, there are too many American workers that don’t have a defined benefit plan. In many cases they have an employer sponsored defined contribution plan, but we know how challenging it can be for those participants to fund, manage, and disburse that benefit. For many others, there is no employer sponsored benefit. Their financial futures are in serious jeopardy.

              That said, what appeared to be a pipe dream once the U.S. Senate failed to take up the BLA legislation has become an amazing success story. Just think of all the economic activity that has been created through these monthly payments that certainly dwarf the $34 million/month mentioned above. Congrats to all who were instrumental in getting this legislation created and passed!

              04.22.25
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              WHY?

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

              Why do we have two different accounting standards in the U.S. for valuing pension liabilities?

              Why does it make sense to value liabilities at a rate (ROA) that can’t be used 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 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 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 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 and watch the mayhem in markets unfold knowing that you don’t have to do anything except sleep very well at night.

              04.14.25
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              ARPA Update as of April 11, 2025

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

              For those observing, may you have a good Passover and a Happy Easter. I was busy this past weekend stuffing 220 eggs with goodies for our 11 grandkids! Let’s hope that weather cooperates. I’m not overly confident on that happening given that we actually had snow during the weekend in northern NJ.

              With regard to ARPA and the PBGC’s implementation of this critical legislation, three more plans received approval of their applications during the past week. Bricklayers Pension Fund of West Virginia (revised), United Wire, Metal and Machine Pension Plan (initial), and Local 945 I.B. of T. Pension Plan (revised), all non-priority group members, will receive a combined $289.1 million in Special Financial Assistance (SFA), including interest and FA loan repayments. This brings the total number of pension plans receiving SFA to 119 funds and more than $71.6 billion in grants.

              There was no apparent activity beyond the approvals mentioned above, as the PBGC’s eFiling portal remains temporarily closed. The prior week also saw no applications withdrawn or denied, no excess SFA repaid, and no new plans added to the waitlist.

              Of the 87 pension plans with a priority designation, 74 have now received approval for an SFA grant (85%) – outstanding! The PBGC still has quite a bit of work to do with 85 plans still in the queue for approval. Fortunately, the challenging capital markets have seen U.S. interest rates rise providing plan sponsors recipients of the SFA to realize greater cost savings and extended coverage through cash flow matching strategies. There is little reason to take on unnecessary risk while uncertainty rules the day.

              04.11.25
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              What Was The Purpose?

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

              I was introduced to the brilliance of Warren Mosler through my friend and former colleague, Chuck DuBois. It was Chuck who encouraged me to read Mosler’s book, “The 7 Deadly Innocent Frauds of Economic Policy”. I would highly recommend that you take a few hours to dive into what Mosler presents. As I mentioned, I think that his insights are brilliant.

              The 7 frauds, innocent or not, cover a variety of subjects including trade, the federal deficit, Social Security, government spending, taxes, etc. Regarding trade and specifically the “deficit”, Mosler would tell you that a trade deficit inures to the benefit of the United States. The general perception is that a trade deficit takes away jobs and reduces output, but Mosler will tell you that imports are “real benefits and exports are real costs”.

              Unlike what I was taught as a young Catholic that it is better to give than to receive, Mosler would tell you that in Economics, it is much better to receive than to give. According to Mosler, the “real wealth of a nation is all it produces and keeps for itself, plus all it imports, minus what it exports”. So, with that logic, running a trade deficit enhances the real wealth of the U.S.

              Earlier this year, the Atlanta Fed was forecasting GDP annual growth in Q1’25 of 3.9%, today that forecast has plummeted to -2.4%. We had been enjoying near full employment, moderating yields, and inflation. So, what was the purpose of starting a trade war other than the fact that one of Mosler’s innocent frauds was fully embraced by this administration that clearly did not understand the potential ramifications. They should have understood that a tariff is a tax that would add cost to every item imported. Did they not understand that inflation would take a hit? In fact, a recent survey has consumers expecting a 6.7% price jump in goods and services during the next 12-months. This represents the highest level since 1981. Furthermore, Treasury yields, after initially falling in response to a flight to safety, have marched significantly higher.

              Again, I ask, what was the purpose? Did they think that jobs would flow back to the U.S.? Sorry, but the folks who suffered job losses as a result of a shift in manufacturing aren’t getting those jobs back. Given the current employment picture, many have been employed in other industries. So, given our full-employment, where would we even get the workers to fill those jobs? Again, we continue to benefit from the trade “imbalance”, as we shipped inflation overseas for decades. Do we now want to import inflation?

              It is through fiscal policy (tax cuts and government spending) that we can always sustain our workforce and domestic output. Our spending is not constrained by other countries sending us their goods. In fact, our quality of life is enhanced through this activity.

              It is truly unfortunate that the tremendous uncertainty surrounding tariff policy is still impacting markets today. Trillions of $s in wealth have been eroded and long-standing trading alliances broken or severely damaged. All because an “innocent” fraud was allowed to drive a reckless policy initiative. I implore you to stay away from Social Security and Medicare, whose costs can always be met since U.S. federal spending is not constrained by taxes and borrowing. How would you tell the tens of millions of Americans that rely on them to survive that another innocent fraud was allowed to drive economic policy?

              04.11.25
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              Milliman – Corporate Pension Funding Falls in March

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

              Milliman has just released its monthly Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Weak investment returns, estimated at -1.4%, drove the PFI asset level down by $25 billion during March. Current assets for the top 100 plans are now $1.3 trillion. The fall in assets was only partially offset by the rise in the discount rate (13 bps) during the month. As a result, the surplus fell by $7 billion to $51 billion as of March 31, 2025.

              The discount rate ended the month at 5.49%, which reduced plan liabilities by $18 billion, to $1.25 trillion by the end of March. As a result of assets falling by more than liabilities, the PFI funded ratio dropped from 104.6% at the end of February to 104.1% at the end of March. For the quarter, discount rates fell 10 basis points and the Milliman 100 plans lost $8 billion in funded status.   

              “While the slight rise in discount rates in March led to a monthly decline in plan liabilities, plan assets fell even further due to poor market performance, which caused the funded status to fall below the 104.8% level seen at the beginning of 2025,” said Zorast Wadia, author of the PFI. Given market action during the first 10 days of April, it will be interesting to see if the impact from rising rates can offset the dramatic fall in asset values. Inflation fears fueled by tariffs could lead to rising bond yields, which will help mitigate some of the risk to equities given the possibility of declining earnings. As Zorast mentioned in the Milliman release, “plan sponsors will want to consider asset-liability matching strategies to preserve their balance sheet gains from last year”, especially given that 30-year corporates are once again yielding close to 6%.

              04.03.25
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              An Ugly Day For Pension America

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

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

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

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

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

              04.01.25
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              The Buying Of Time Can Reap Huge Rewards

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

              When we present the list of benefits associated with using Cash Flow Matching (CFM), one of the benefits that we highlight is the buying of time a.k.a. an extended investing horizon. Our pension community tends to fall prey to short-termism despite claiming to be long-term investors. Quarterly observations are presented through the consultants regular performance reviews and managers are often dismissed after a relatively short period of “underperformance”. Actuarial reports tend to be annual which dictate projected contribution expenses. Yet, by extending the investment horizon to something more meaningful like 10-years or more, the probability of achieving the desired outcome is dramatically improved.

              I recently played around with some S&P 500 data dating back to 12/31/69 and looked at the return and standard deviation of observations encompassing 1-10-year moving averages and longer periods such as 15-, 20-, 30-, and even 50-year moving averages for the industry’s primary domestic equity benchmark. Living in a one-year timeframe may produce decent annual returns, but is also comes with tremendous volatility. In fact, the average one-year return from 12/69 to 2/25 has been 12.5%, but the annual standard deviation is +/- 16.6%, meaning that 68% of the time your annual return could be +29.1% to -4.1%. Extending the analysis to 2 standard deviations (95% of the observations) means that in 19 out of 20 years the range of results can be as broad as +45.7% to -20.7%.

              However, extend out your investing horizon to 10-years, and the average return from 12/69 dips to 11.4%, but the standard deviation collapses to only 5.0% for a much more comfortable range of +16.4% to 6.4%. Extend to 2 standard deviations and you still have a positive observation in 19 out of 20 years at +1.4% as the lower boundary. Extend to 30-years and the volatility craters to only +/-1.2% around an average return of 11.25%.

              We, at Ryan ALM, were blessed in 2024 to take on an assignment to cash flow match 30+ years of this plan’s liabilities. We covered all of the projected liability cash flows through 2056 and still had about $8 million in surplus assets, which were invested in two equity funds, that can now just grow and grow and grow since all of the plan’s liquidity needs are being covered by the CFM strategy! So, how important is a long investing runway? Well, if this plan’s surplus assets achieve the average S&P 500 30-year return during the next 30-years, that $8 million will grow to >$195 million.

              We often speak with prospects about the importance of bifurcating one’s asset base into two buckets – liquidity and growth. It is critically important that the plan’s liquidity be covered through the asset cash flows of interest and principal produced by bonds since they are the only asset with a known future value. CFM eliminates the need for a cash sweep which would severely reduce the ROA of growth assets. This practice will allow the growth or alpha assets to wade through choppy markets, such as the one we are currently witnessing, without fear that liquidity must be raised to meet benefits at a less than opportune time.

              The plan sponsor highlighted above was fortunate to have a well-funded plan, but even plans that are less well-funded need liquidity. Ensuring that benefits and expenses can be met monthly (chronologically) without forcing liquidity that might not naturally exist is critical to the successful operation of a pension plan. CFM can be used over any time frame that the plan sponsor desires or the plan can afford. We believe that extending the investment horizon out to 10-years should be the minimum goal, but every plan is unique and that uniqueness will ultimately drive the decision on the appropriate allocation to CFM.

              03.31.25
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              ARPA Update as of March 28, 2025

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

              Welcome to the last update of March. If you are a fan of both Men’s and Women’s college basketball, there wasn’t as much “madness” as usual during the respective tournaments, as all #1 seeds made the men’s Final Four, while only teams seeded either #1 or #2 made the woman’s Final Four. However, these teams should make for a very exciting and competitive games as they conclude. I’m still waiting for Fordham to get there one day.

              Now onto the task at hand. Regarding ARPA and the PBGC’s implementation of this critical legislation, last week was fairly busy. Three non-priority group funds, including United Food and Commercial Workers Unions and Participating Employers Pension Plan, Roofers Local 88 Pension Plan, and Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund, filed initial applications seeking a total of $241.7 million in Special Financial Assistance (SFA) that will support the promised benefits for 14,769 workers. There are 22 funds that currently have an application before the PBGC.

              In addition to the new fillings, Oregon Processors Seasonal Employees Pension Plan, received approval of its revised application. They will receive $19.9 million in SFA and interest to help cover the promised pensions for 7,279 members. There were no applications denied during the previous week, but there were a couple of initial applications from non-priority group members withdrawn. Distributors Association Warehousemen’s Pension Trust and Alaska Teamster – Employer Pension Plan were seeking $206.6 million in SFA for nearly 12,200 participants.

              In other ARPA news, the PBGC recouped  $994,701.30 or 1.55% in excess SFA paid by The Newspaper Guild International Pension Plan. The PBGC has now recouped $202.2 million in excess SFA from grants totaling $47.5 billion or 0.42% of the proceeds. These funds, including another 4 that didn’t receive any excess proceeds, were among the roughly 60 that received awards before they were given access to the Social Security’s Master Death File.

              Lastly, there was one more multiemployer fund added to the waitlist. The Plasterers Local 79 Pension Plan becomes the 117th plan to be placed on the waitlist. Fortunately, the PBGC has begun the process on all but 45 of those.