Tag Archives: uncertainty

02.06.25
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Interesting Insights From Ortec Finance

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

PensionAge’s, Paige Perrin, has produced an article that referenced recent research from Ortec Finance. The research, which surveyed senior pension fund executives in the UK, US, the Netherlands, Canada, and the Nordics, found that 77% believe that risk will be elevated, either dramatically or slightly, in 2025. That’s quite the stat. It also follows on reporting from P&I that referenced heightened uncertainty by U.S. plan sponsors. As regular readers of this blog know, I’ve been suggesting to (pleading with) sponsors that they don’t need to live with uncertainty, which is truly uncomfortable.

Among several risks cited were interest rates, inflation, and market volatility. I can’t say that I blame them for their concerns. Who among us are able to adequately forecast rates and inflation? Seems like most fixed income professionals and bond market participants have been forecasting an aggressive move down in rates. Some of these prognosticators were forecasting as many as 7 rate reductions in 2024 and several others in 2025. We didn’t get 2024’s tally. Who knows about 2025 given that inflation has remained fairly sticky.

There is an easy fix for those of you who are concerned about interest rates and inflation. Adopt a cash flow matching (CFM) strategy that will carefully match asset cash flows of interest and principal with liability cash flows (benefits and expenses). Because benefit payments are future values (FVs), they are not interest rate sensitive. Problem solved! Furthermore, the use of CFM extends the investing horizon for the remainder of the fund’s growth assets, so they now have the appropriate time to grow to meet future liabilities.

One other startling stat caught my attention, as “77 per cent of senior pension fund executives believe the increasing number of retirees relative to the number of new hires in defined benefit (DB) plans pose a “significant” or “slight” risk to the DB pensions industry.” That concern is misplaced. I just wrote a post earlier this week on that subject. DB Pension plans are not Ponzi Schemes. They don’t need more depositors than those receiving payments. It is truly frightening that a significant percentage of our senior plan sponsors don’t understand how these plans are actuarial determined and subsequently funded.

Lastly, I nearly jumped out of my chair with excitement when I read the following quotes from Marnix Engels, Ortec Finance’s managing director for global pension risk, who stated the following:

“We believe assessing the risks of both (the bolding is my emphasis) assets and liabilities in combination is crucial to get the full picture on the health of a pension fund,” he said.

“If the impacts of risk drivers are only understood for one side of the funding health equation, then it is possible to misrepresent the overall effect.”

“If a fund is not assessing both assets and liabilities, then it is difficult to conclude the overall impact of interest rate hikes on the plan’s funding ratio.”

YES!!

12.18.24
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P&I: Asset Owner CIOs See Uncertainty in 2025

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

P&I is out with a story today about asset owner CIOs “forecasting” uncertainty for 2025. The capital markets are always uncertain. It only takes a “surprise” to disrupt even the most obvious trend. Given a new regime in Washington, stubborn inflation, geopolitical risks throughout the globe, and equity valuations that are stretched (that’s putting it mildly), CIOs have reason to be uncertain, especially over a short timeframe, such as a calendar year or two.

The lack of certainty can be destabilizing to individuals and investment strategies. I covered the psychology of uncertainty in a post earlier this year. Here were a few highlights:

  • When facing ongoing uncertainty, our bodies stay at a high level of physiological arousal, exerting considerable wear and tear.
  • Uncertainty exerts a strong pull on our thoughts and inhibits our ability to act, leaving us in a suspended waiting game.
  • We can manage uncertainty by figuring out what we can control, distracting ourselves from negative thoughts, and reaching out to others.

The last point is particularly important. We can manage “uncertainty” by figuring out what we can control. As a plan sponsor, we can utilize an investment strategy (cash flow matching or CFM) that creates certainty for the portion of the portfolio that uses CFM. In the following post, I question the significant use of equity and equity-like product in public pension systems that are accompanied by tremendous annual volatility. Again, this produces great uncertainty.

Adopting the use of greater fixed income exposure also doesn’t ensure less uncertainty, as changes in US interest rates can play havoc on fixed income strategies. ONLY with a CFM strategy do you bring certainty of cash flows (absent any defaults) to the management of pension plans. Traditional fixed income strategies benefited from a nearly 4-decade move down in rates, but there is currently great uncertainty as to the future direction of inflation and as a result, rates. With CFM one knows what the performance will look like a decade from now. With a fixed income strategy focused on a generic index, such as the BB Aggregate, one has no idea how that portfolio will perform 10 or more years from now.

Lastly, there is no reason to live with the uncertainty that many CIOs currently foresee. I wrote a piece just recently on achieving “peace of mind“. Uncertainty won’t help you in your quest for a good night’s sleep, but achieving peace of mind is very much achievable once you adopt a CFM strategy and secure the promised benefits (or grants) for some period of time. Call us. We want to remove as much uncertainty from your professional life as possible.