Tag Archives: security

10.13.26
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Why Wait To Buy That Security?

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

As I’ve mentioned before, I like getting responses to the many blog posts that I publish. A recent response to the possible use of Cash Flow Matching (CFM) was “My plan has a 10+-year duration. We are not close to using CFM”. Thanks for the observation. Here’s what I’d say to that:

I wouldn’t view a 10+-year duration for a pension plan as either unique or one that is “not close” to using cash flow matching. Duration strategies and CFM address two very different purposes. A plan’s duration tells us something about the interest-rate sensitivity and timing of the pension plan’s liabilities. It doesn’t tell us whether those promised benefits should begin to be secured today, especially given the higher interest rate environment.

For Ryan ALM, the more important question is “What is the plan’s funded status/funded ratio”? If a plan has sufficient assets to secure a meaningful portion of its future benefit payments, why would a pension plan wait simply because the liability duration is 10+-years? Importantly, CFM DOESN’T require matching the entire liability stream or waiting until a plan is closed, frozen, or very mature. A plan can establish a CFM portfolio today that secures, for example, the next 5-, 10-, 15-, or more years of projected benefits and expenses, while the remaining assets continue to pursue growth to meet future liabilities. As an FYI, we have multiple 30+-year assignments.

Furthermore, many pension plans have negatively impacted the liquidity available to meet the monthly obligations through asset migration to non-public investments. CFM dramatically improves a plan’s liquidity profile. A duration strategy doesn’t provide liquidity!

We’d suggest that the better funded a plan becomes, the stronger the argument may be for taking some risk off the table, especially during these highly uncertain times. Funding improvement/security represents progress toward fulfilling the pension promise. CFM allows the sponsor to secure and monetize some of that progress by converting assets into contractual bond cash flows designed to meet those future benefit payments.

Finally, if the desire of the pension plan sponsor is to mitigate interest rate risk, CFM provides a superior duration match since every month of the assignment is duration matched. So, a 10-year CFM mandate would have 120 bespoke duration matches as opposed to an “average” duration or a few key rates matched along the Treasury yield curve.

Rather than observing that a pension plan with a 10+-year duration means that plan isn’t ready for CFM, I would counter with; “Why wouldn’t a plan sponsor want to secure a portion of the promises where a plan could improve liquidity, secure benefits, reduce the cost of those future benefits, and extend the investing horizon for the residual assets to grow unencumbered?”

Keep the questions and observations coming. Thank you.

06.05.26
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It is Our Mission!

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

The individual professionals on the Ryan ALM, Inc. team have both a personal and professional mission which drives us every day! What is that mission? We are driven with the goal of protecting and preserving defined benefit pension plans, which we believe are the only true retirement plans. Any other “retirement” vehicle pales in comparison. Yet, our industry has adopted practices which we believe are detrimental to the long-term stability of these critically important plans.

Pursuing an objective focused on return has created an environment that has these DB plans on a perpetual rollercoaster of performance, ultimately creating unnecessary instability and uncertainty as it relates to both contributions and funded status. As a reminder, we believe that the primary objective in managing a DB pension plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is not a performance objective.

Recently, I reviewed a pension plan that believed its biggest challenge was improving returns. After examining its cash flow needs, we discovered the larger issue was liquidity. By addressing liquidity first, the trustees reduced risk, a key action in these uncertain times, while improving confidence in their ability to meet future benefit payments. Furthermore, most trustees I speak with are wrestling with the same issues—liquidity, uncertainty, and how much risk is appropriate at this stage of the investing cycle.

Through Cash Flow Matching (CFM), a dedicated investment-grade bond portfolio in which we carefully match asset cash flows of principal and interest against the liability cash flows of benefits and expenses, we are able to bring certainty to your cash flow needs through enhanced liquidity. I’d be happy to walk through your plan’s cash flow profile and show you how a cash flow matching approach would support your current asset allocation.

Every pension plan is different, but every trustee shares the same responsibility: ensuring promised benefits are paid. Markets will do what markets do. Interest rates will rise and fall. Economic uncertainty will come and go. The question is whether your pension plan is structured to withstand those events without jeopardizing the promises made to participants.

If you’re not completely certain that your fund is structured appropriately, let us at Ryan ALM work with you to protect and preserve your DB plan, as it is our collective mission. Your fund’s participants will appreciate knowing that their promised benefits have been secured for some period of time. If you’d like a second opinion on your plan’s liquidity profile, cash flow needs, or overall asset allocation strategy, let’s talk. A 30-minute conversation may help you see risks—and opportunities—that aren’t visible through a funded ratio or return assumption lens.

06.02.26
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As Clara Would Ask: “Where’s the Beef?”

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

Clara Peller became famous as a result of her participation in the 1984 Wendy’s ad campaign in which she famously asks, “where’s the beef?”. Her comment was of course in reference to Wendy’s competitors whose burgers were less than impressive in size.

Yesterday, I produced a post highlighting the many benefits of cash flow matching (CFM), including providing ALL the necessary liquidity, creating an extended investing horizon, providing certainty and security, lower management fees, stable contributions/funded ratio, and the elimination of interest rate risk.

Despite the plethora of benefits, we occasionally receive push back from plan sponsors and their advisors on the use of CFM because some folks believe that they can identify a fixed income manager or group of bond managers that will “outperform” a CFM portfolio thus supporting the ROA target, as if that was the primary objective. As we’ve stated many times, the primary objective in managing a defined benefit plan is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is NOT a return objective.

But, let’s just say for argument’s sake that using bonds in your fund was for return purposes. The greatest risk in managing U.S. fixed income is interest rate risk. Yes, most of us grew up in this industry during the last 40+ years when interest rates declined from ridiculous levels (10-year Treasury yield was 15.1% on the day I entered this business (October 1981)) to the zero-rate environment created by Covid-19. Most core fixed income managers continue to use the Barclays Aggregate (formerly Lehman) Index as the benchmark. The YTW on that index is 4.67%. A yield that is certainly below most, if not all, ROA targets for DB pensions (certainly public and multiemployer plans). Moreover, the yield on the Ryan ALM CFM is over 5.00% since it is a portfolio of primarily A/BBB+ corporate bonds. Our CFM should outperform the Agg by the yield difference given the same or similar duration.

Furthermore, that core fixed income manager(s) will actively position exposures related to the types of bonds, including Treasuries, agencies, MBS/ABS/CMOs, corporates, duration, sectors, etc. relative to the index to try to capture some excess return. But is “active management” adding value and what is the annual volatility or standard deviation associated with that activity? Many bond investors benefited from the nearly 4 decade decline in rates, as bond prices rose when yields fell. However, most investors today weren’t around for the 28-years prior to 1981 when U.S. interest rates rose! Things were much different for bond managers then.

Do you know in which direction interest rates will travel during the next 1-, 3-, 5- or more years? We, at Ryan ALM, certainly don’t and we don’t need to know. Given that the greatest risk to an active core bond strategy is rates, why do you remain confident that your manager(s) will consistently meet or exceed the index’s return? With CFM, there is no guessing as to what rates will do. On the day that the CFM portfolio is created, asset cash flows of principal and interest are matched against the liability cash flows of benefits and expenses. As rates move (either up or down), that careful match remains, which is how we can claim that both security and certainty (barring a default) is achieved. Your core manager can’t make that claim because the Aggregate index looks nothing like your unique liabilities.

By the way, the “Agg” is up only 0.17% for the 5-years ending May 31, 2026. On a YTD basis, the index has produced a 0.38% return. Do you think that those results are helping or hurting your fund? As Clara asked 42-years ago (oh, my!), “where’s the beef?” I can tell you. It is found in a CFM strategy and it is a whopper!