What is My Funded Ratio? Who Cares!

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

The funded ratio of a DB pension plan gets a lot of attention, especially if it is perceived to be weak. But does the funded ratio truly tell you the whole story as to the financial health of a DB pension plan? We, at Ryan ALM, Inc. don't think so.

So, how is the funded ratio calculated:

Funded ratio = MV of plan assets / plan liabilities earned to date X 100

The market value of assets is a present value (PV) calculation. The market value of liabilities is the future value of liabilities earned to date discounted back to a PV calculation based on a discount rate. For public and multiemployer plans the discount rate tends to be the fund's return on asset assumption (ROA), while it is an AA corporate blended rate for private pensions. In today's interest rate environment, the discount rate for private plans will be roughly 1.5% less than the discount rate based on the average ROA. That means that liabilities for private funds will have a greater current value than the value of liabilities calculated based on the discount rate using the ROA. Oh, okay, so the choice of a discount rate can change my funded ratio. That's interesting. So that tells me that if I wanted to improve my funded ratio, all I'd have to do is increase my discount rate to lower the PV of my liabilities. That's very interesting.

So, it appears that the funded ratio calculation can be manipulated to some extent. As we think about the formula above, is there anything missing? Yes, where are the future contributions, which can be significant. Why are future payment liabilities in the calculation, but projected contributions, which are future assets of the fund, not included? Common thinking suggests that those future contributions aren't guaranteed, which is why they aren't factored into the funded ratio calculation. However, is that a correct assumption? In doing some research, it appears >80% of DB pension funds receive 100% of the annual required contribution (ARC). Even NJ's public pension system is making the ARC and then some.

We recently had a conversation with a large plan sponsor who thought that their fund was <50% funded based on the formula above. Not surprisingly, they were very focused on this ratio and looking for investment strategies that could potentially enhance it. As an FYI, this plan's future contributions as forecasted by their actuary were significant. In fact, future contributions were so large that they were equal to 73% of the forecasted liabilities! Yes, without including the pension fund's current assets, this plan was 73% funded, provided those projected contributions were met which they have been for more than a decade.

So, given these forecasted contributions is that pension fund really <50% funded?

In another example, the same fund that thought that they were poorly funded, could defease net pension liabilities for the next 33-years. How is it possible that a plan that believes it is <50% funded able to significantly reduce risk, enhance liquidity, and SECURE pension promises for 33-years? Furthermore, this fund was going to establish a $4.4 billion surplus on the day that those benefits and expenses were defeased for 33-years. If it just earned the projected ROA, that $4.4 billion would grow to $34.2 billion during that 33-year period. Wow! 

So, I ask once more, does that sound like a plan in financial distress, which a funded ratio of <50% might suggest? NO!

The funded ratio is but one measure of a pension plan's health. Unfortunately, many in our industry would look at that # and say that more risk needs to be taken to achieve “full funding" down the road, when in fact reducing risk through a cash flow matching (CFM) strategy is the appropriate approach. It is past the time to get off the scary asset allocation rollercoaster. 

What Would You Do?

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

Happy St. Paddy's Day to my Irish friends (I'm 1/2 Irish) and those that would like to be. May the luck of the Irish embrace you today.

As many of you know, we are always willing to provide to the pension and E&F communities a free analysis to highlight how a Cash Flow Matching (CFM) mandate could secure the promised benefits/grants for your fund and importantly, provide the necessary liquidity to meet future promises. In many cases, we will produce multiple runs covering a variety of periods usually 5-years to 30-years. Often the sponsor of the fund is shocked by the potential cost reduction of those future obligations.

We recently provided a large pension plan with several potential implementations, as they try to improve the fund's liquidity profile, while also desiring to secure those future promises. Here are three scenarios that we provided to them and I'd welcome your feedback on what you would do.

Scenario #1 - Provide a CFM portfolio using the core fixed income allocation ($3 billion/15% of total assets) to match and fund the NET (after contributions) liability cash flows of benefits and expenses (B&E). In this scenario, we can cover the next 6-years of B&E through 6/30/32, covering $3.44 billion in FV benefits and expenses for $3.0 billion (a cost reduction of $443.3k or 12.88%). The YTM on the portfolio is 4.09 and the duration 3.09 years, with the average quality being A-. The remaining assets can continue to be managed as they currently are, but they now benefit from a 6-year investing horizon in which they are no longer providing any liquidity to meet monthly obligations.

Scenario #2 - Provide a CFM portfolio using the same $3 billion (only needed $2.96 billion) or 15% of the fund's total assets, but implement the strategy using a vertical slice of the liabilities going out 30-years. In this example, we can cover 22% of the liability cash flows for the next 30-years. The FV of those liabilities are $6.3 billion (as opposed to the $3.44 billion using 100% CFM for 6-years). We can reduce the FV cost by $3.33 billion or 53%. The remaining 85% of the fund's assets can be managed as they presently are, but they don't benefit from the longer investing horizon, as they will be called upon to provide liquidity to meet the residual B&E.

Scenario #3 - 100% CFM covering net liabilities through 6/30/59. In this case we showed that we can cover 100% of the NET B&E for $9.9 billion in assets, while providing the plan with a $4.4 billion surplus. The FV of those B&E through 2059 are reduced by about $13 billion or 56%! The surplus assets now have a 33-year investing horizon to just grow and grow! A modest 6.5% annualized return for that period produces a surplus of $34.2 billion that can be used to fund B&E after 2059, enhance benefits, and/or reduce future contributions. An 8% annualized return produces a surplus >$75 billion. Oh, my! Also, in this scenario, the organization ONLY needs an annual 2.56% return on the remaining assets to fully fund ALL projected B&E well beyond 2059, as determined by our Asset Exhaustion Test (AET).

Importantly, these scenarios only work if the sponsoring entity provides the forecasted contributions, which in this case they have consistently done for the past 10+ years.

So, I ask once again, what would you do? Scenario 1 ($3 billion/15% of total assets) provides a 100% coverage for 6-years while reducing cost by 13%. Scenario 2 reduces the cost of FV B&E by 53% or $3.4 billion, but covers only 22% of the liabilities, while Scenario 3 reduces the FV cost by 56%, while securing the net promises through 2059 for a cost of $9.9 billion resulting in a surplus of $4.4 billion.

I guess that there is a fourth scenario which is to do nothing, but why would you want to continue to ride the proverbial performance rollercoaster that only guarantees volatility and not success when you can secure a portion of the liabilities, significantly reduce the cost of those future promises, improve liquidity, and "buy time" for the residual assets to just grow unencumbered?

As the Irish say - "May the most you wish for be the least you get".

DB Pension Plan "Absolute Truths" Revisited

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

This post may be familiar to some of you, as I originally published it in October 2024. Given today's great uncertainty related to geopolitics, markets, and the economy, I thought it relevant to share once again. Please don't hesitate to reach out to me if you want to challenge any part of this list. We always welcome your feedback.

The four senior members at Ryan ALM, Inc. have collectively more than 160 years of pension/investment experience. We’ve lived through an incredible array of markets during our tenures. We have also witnessed many attempts on the part of Pension America to try various strategies to meet the promises that have been made to the pension plan participants.

Regrettably, defined benefit (DB) pension plans continue to be tossed aside by corporate America in favor of defined contribution (DC) plans. Both public and multiemployer plan sponsors would be wise to adopt a strategy that seeks more certainty to protect and preserve these critically important retirement vehicles before they are subject to a similar fate.

We’ve compiled a list of DB pension “Absolute Truths” that we believe return the management of pension plans back to its roots when SECURING the promised benefits at a reasonable cost and with prudent risk was the primary objective. The dramatic move away from the securing of benefits to the arms race focused on the return on asset assumption (ROA) has eliminated any notion of certainty in favor of far greater variability in likely outcomes.

Here are the Ryan ALM DB Truths:

• Defined Benefit (DB) pension plans are the best retirement vehicle!
• They exist to fulfill a financial promise that has been made to the plan participant upon retirement.
• The primary objective in managing a DB plan is to SECURE the promised benefits at a reasonable cost and with prudent risk.
• The promised benefit payments are liabilities of the pension plan sponsor.
• Liabilities need to be measured, monitored, and managed more than just once per year.
• Liabilities are future value (FV) obligations – a $1,000 monthly benefit is $1,000 no matter what interest rates do. As a result, they are not interest rate sensitive.
• Pension inflation is not equal to the CPI but a rate unique to each plan sponsor.
• Best way to hedge pension inflation is through Cash Flow Matching (CFM) since inflation is in the actuarial projections
• Plan assets (stocks, bonds, real estate, etc.) are present value (PV) or market value (MV) calculations. We do not know the FV of assets except for bonds cash flows (interest and principal at maturity).
• To measure and monitor the funded status, liabilities need to be converted from FV to PV – a Custom Liability Index (CLI) is absolutely needed.
• A discount rate is used to create a PV for liabilities – ROA (publics), ASC 715 (corps), STRIPS, etc.
• Liabilities are bond-like in nature. The PV of future liabilities rises and falls with changes in the discount rate (interest rates).
• The nearly 40-year decline in US interest rates beginning in 1982 crushed pension funding, as the growth rate for future liabilities far exceeded the growth rate of assets.
• The allocation of plan assets should be separated into two buckets – Liquidity (beta) and Growth (alpha).
• The liquidity assets should consist of a bond portfolio that matches (defeases) asset cash flows with the plan’s liability cash flows (benefits and expenses (B&E)).
• This task is best accomplished through a CFM investment process.
• The liquidity assets should be used to fund B&E chronologically buying time for the alpha assets to grow unencumbered in their quest to meet those faraway future liabilities not yet defeased by the liquidity assets.
• The Growth assets will consist of all non-bonds, which can now grow unencumbered, as they are no longer a source of liquidity. Growth assets will fund those remaining future liabilities not yet defeased by the liquidity assets.
• The Return on asset (ROA) assumption should be a calculated # derived through an Asset Exhaustion Test (AET)
• The pension plan’s asset allocation should be responsive to the plan’s funded status and not the ROA.
• As the funded status improves, port alpha (profits) from the Growth portfolio into the Liquidity bucket (de-risk) extending the cash flow matching assignment and securing more promises.
• This de-risking ensures that plans don’t continue to ride the asset allocation rollercoaster leading to volatile contribution costs.
• DB plans are a great recruiting and retention tool for managing a sponsor’s labor force.
• DB plans need to be protected and preserved, as asking untrained individuals to fund, manage, and then disburse a “benefit” through a Defined Contribution plan is poor policy.
• Unfortunately, doing the same thing over and over and over is not working. A return to pension basics is critical.

You’ve made a promise: measure it – monitor it – manage it – and SECURE it…   

Get off the pension funding rollercoaster – sleep well!

Milliman: Corporate Pension Funding now at 109.4%

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

Milliman has released the latest monthly report on the Milliman 100 Pension Funding Index (PFI). As a reminder, this index analyzes the 100 largest U.S. corporate pension plans.

For February, the PFI funded ratio rose from 109.1% as of January 31, to 109.4% as of February 28, marking the highest collective funded ratio since the 109.9% mark observed in July 2001. However, the funding improvement was solely a result of asset performance, as declining discount rates of 14 basis points reduced the discount rate to 5.33% and raised the PFI projected benefit obligation (liabilities) to $1.235 trillion. Fortunately, monthly returns of 2.15% offset the impact of falling U.S. interest rates leading to growth in the market value of plan assets by $22 billion, to $1.351 trillion.

“February’s investment performance drove the month’s $5 billion gain in funding levels,” said Zorast Wadia, author of the Milliman PFI. He went on to say that “while this marks 11 straight months of funding improvements, further declines in interest rates may occur, and ongoing market volatility makes it vital for plan sponsors to undertake surplus-management strategies focused on both sides of the balance sheet.” We continue to support Zorast in recommending that managing assets to liabilities is critical for DB pension plans in all market environments, but especially given the significant uncertainty under which markets are currently operating. As a reminder, the primary objective in managing a DB pension is to SECURE the promised benefits at a reasonable cost and with prudent risk. It is NOT a return objective.

We, at Ryan ALM, do not forecast interest rates, but the impact of rising oil prices (WTI currently up 30.7% as of 9:13 am EST since Friday) will likely have an impact on inflation and interest rates. It will be interesting to see if a potential fall in the value of liabilities proves greater than the potential impact that rising rates might have on equity markets and other assets. Will we see the 12th consecutive month of improved funding levels?

Please click on the link below for a look at the complete Milliman corporate pension funding report.

View this month's complete Pension Funding Index.

New Jersey's Pension System's "High" Investment Return

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

As a taxpaying resident in New Jersey and a huge supporter of defined benefit plans who has a daughter in the system, I was happy to read that NJ's pension systems generated strong investment returns in fiscal year 2025, reporting a nearly 11% return. Terrific. Yet, despite the above target return (7.0% ROA), the impact on the system's funded status was negative. Yes, the funded ratio improved (assets/liabilities), but the funded status further deteriorated (funding gap in $s). Since the system is striving for 7% and the combined funded ratio of the various plans is <50%, a system like NJ's would need to double the annual return on asset target just to keep the $ deficit stable.

It is great to see that NJ is finally bringing some financial discipline to the management of its pensions, with contributions at least matching the Actuarial Determined Contribution (ADC), but after decades of failing to do so (I think since Washington slept here), the systems are in need of significant funding improvement. Trying to generate outsized gains through a riskier asset allocation is not a long-term winning formula, often leading to greater annually required contributions when markets behave badly and assets get whacked.

The management of DB pension plans is not rocket science if the basics of sound pension management are followed. For instance, plans receiving the full ADC have on average an 80% funded ratio, while those not receiving the full ADC sit with funded ratios <70% (NCPERS study). Plans sitting with funded ratios below 50% are not likely to create enough excess return relative to the annual ROA to be able to close the funding gap. This often leads to plans making difficult decisions such as creating plans with multiple tiers, which I really despise.

Plans should focus on meeting the ADC, securing the promised benefits in the near-term, which buys time for the growth or alpha assets to perform, and reduce costs of administration, including management fees. DB plans are critical to the creation of a dignified retirement. Having a significant percentage of our seniors lacking the financial wherewithal to remain active in our economy is a major problem with long-term implications.

Milliman: Corporate Pension Funding Soars

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

Milliman has once again released its monthly Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans, and the news continues to be quite good.

Market appreciation of 1.05% during January lifted the market value of PFI plan assets by $8 billion increasing total AUM to $1.327 trillion. A slight 1 bp rise in the discount rate to 5.47% lowered plan liabilities marginally to $1.217 trillion at the end of January. As a result, the PFI funded ratio climbed from 108.2% at the beginning of the year to 109.0% as of January 31, 2026. 

“January’s strong returns contributed $8 billion to the PFI plans’ funding surplus, while declining liabilities contributed another $2 billion,” said Zorast Wadia, author of the Milliman 100 PFI. “Although funded ratios have now improved for 10 straight months, managing this surplus will continue to be a central theme for many plan sponsors as they employ asset-liability matching strategies going forward.” We couldn't agree more, Zorast! Given significant uncertainty regarding the economy, inflation, interest rates, and geopolitical events, now is the time to modify plan asset allocations by reducing risk through a cash flow matching strategy (CFM).

CFM will secure the promised benefits, provide the necessary monthly liquidity, extend the investing horizon for the non-CFM assets, while stabilizing the funded status and contribution expenses. Corporate plan sponsors have worked diligently tom improve funding and markets have cooperated in this effort. Now is not the time to "let it ride". Ryan ALM will provide a free analysis to any plan sponsor that would like to see how CFM can help them accomplish all that I mentioned above. Don't be shy!

Click on the link below for a look at Milliman's January funding report.

View this month's complete Pension Funding Index.

For more on Ryan ALM, Inc.

Milliman: Another good month for pension funding

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

Whether one is referring to public pensions or private DB plans, September was a continuation of the positive momentum experienced for most of 2025. Milliman has reported on both the Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans and its Public Pension Funding Index (PPFI), which analyzes data from the nation’s 100 largest public defined benefit plans.

Milliman estimates that public pension funds saw aggregate returns of 1.7%, while corporate plans produced an average return for the month of 2.5%. As a result of these gains (sixth consecutive gain), public pension funded ratios stand at 85.4% up from 84.2% at the end of August. Corporate plans are now showing an aggregate funded ratio of 106.5%, marking the highest level since just before the Great Financial Crisis (GFC).

Public pension fund assets are now $5.66 trillion versus liabilities of $6.63 trillion, while corporate plans added $26 billion to their collective net assets increasing the funded status surplus to $80 billion. For corporate plans, the strong 2.5% estimated return was more than enough to overcome the decline in the discount rate to 5.36%, a pattern that has persisted for much of 2025.

“Robust returns helped corporate pension funding levels improve for the sixth straight month in September,” said Zorast Wadia, author of the Milliman PFI. "With more declines in discount rates likely ahead, funded ratios may lose ground unless plan assets move in lockstep with liabilities.”

“Thanks to continued strong investment performance, public pension funding levels continued to improve in September, and unfunded liabilities are now below the critical $1 trillion threshold for the first time since 2021,” said Becky Sielman, co-author of the Milliman PPFI. “Now, 45 of the 100 PPFI plans are more than 90% funded while only 11 are less than 60% funded, underscoring the continued health of public pensions.”

Discount rates have so far fallen in October. It will be interesting to see if returns can once again prop up funded status for corporate America. It will also be interesting to see how the different accounting standards (GASB vs. FASB) impact October's results. A small gain for corporate plans may not be enough to overcome the potential growth in liabilities, as interest rates decline, but that small return may look just fine for public pension plans, that don't mark liabilities to market only assets.

View this Month's complete Pension Funding Index.

View the Milliman 100 Public Pension Funding Index.

Corporate Pension Funding - UP!

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

I was out of the office last week, and as a result I am trying to play catch-up on some of the stories that I think you'd be interested in. Happy to report that Milliman released its monthly Milliman 100 Pension Funding Index (PFI), which, as you know, analyzes the 100 largest U.S. corporate pension plans. Importantly, the news continues to be good for corporate pension funding.

For July, a discount rate increase of 3 bps helped stabilize corporate pension funding, lowering the Milliman PFI projected benefit obligation (PBO) by $6 billion to $1.213 trillion as of July 31. Anticipated investment returns were marginally subpar at 0.38%. After taking into consideration a higher discount rate, marginal investment gains, and net outflows, overall corporate pension funding increased by $4 billion for the month.

The Milliman 100 PFI funded ratio now stands at 105.3% up from June's 105.7%. For the last 12-months, the funded ratio has improved by 2.8%, as the collective funded status position improved by $32 billion. “July marks four straight months of funding improvement, with levels not seen since late 2007, before the global financial crisis,” said Zorast Wadia, author of the PFI. “In order to preserve funded status gains, plan sponsors should be thinking about asset-liability management strategies to help mitigate potential discount rate declines in the future.” We couldn't agree more with you, Zorast!

As highlighted below, overall corporate pension funding has improved dramatically. A significant contributor to this improvement has been the rise in U.S. interest rates which significantly lowered the present value of those future benefits. Let's hope that the current funding will encourage plan sponsors to maintain their DB pension plans for the foreseeable future. You have to love pension earnings as opposed to pension expense!

View the complete Pension Funding Index.

Milliman: Corporate Pension Funding Up

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

Milliman released its monthly Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans, and they are reporting that the collective funded ratio has risen to 105.1% as of June 30th from 104.9% at the end of May. The driving force behind the improved funding was the powerful 2.6% asset return for the index's members, which more than offset the growth in pension liabilities as the discount rate fell by 19 bps.

As a result of the significant appreciation during the month, the Milliman PFI plan assets rose by $27 billion to $1.281 trillion during the month from $1.254 trillion at the end of May. The discount rate fell to 5.52% in June, from 5.71% in May and it is now down slights from 5.59% at the beginning of the year. 

“The second quarter of 2025 was a win-win for pensions from both sides of the balance sheet, as market gains of 3.42% drove up plan assets while modest discount rate increases of 2 basis points reduced plan liabilities and resulted in the highest funded ratio since October 2022,” said Zorast Wadia, author of the PFI.

Zorast further stated that "if discount rates decline in the second half of the year, plan sponsors will need to be ever more focused on preserving funded status gains and employing prudent asset-liability management.” We couldn't agree more. We, at Ryan ALM, believe that the primary goal in managing a DB pension plan is to secure the promised benefits at a reasonable cost and with prudent risk. It is NOT a return objective. Having achieved this level of funding allows plan sponsors and their advisors to significantly de-risk their plans through Cash Flow Matching (CFM), which is a superior duration strategy, as each month of the assignment is duration matched.

Improved Corporate Pension Funding - Milliman

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

Milliman released the results of its 2025 Corporate Pension Funding Study(PFS). The study analyzes pension data for the 100 U.S. public companies with the largest defined benefit (DB) pension plans. Unlike the monthly updates provided by Milliman, this study covers the 2024 fiscal years (FY) for each plan. Milliman has now produced this review for 25 consecutive years.

Here are Milliman's Key findings from the 2025 annual study, including:

• The PFS funded percentage increased from 98.5% at the end of FY2023 to 101.1% in FY2024, with the funded status climbing from a $19.9 billion deficit to a $13.8 billion surplus.
• This is the first surplus for the Milliman 100 companies since 2007.
• As of FY2024, over half (53) of the plans in the study were funded at 100% or greater; only one plan in the study is funded below 80%. RDK note: This is a significant difference from what we witness in public pension funding studies.
• Rising U.S. interest rates aren't all bad, as the funding improvement was driven largely by the 42-basis point increase in the PFS discount rate (from 5.01% to 5.43%)
• Higher discount rates lowered the projected benefit obligations (PBO) of these plans from $1.34 trillion to $1.24 trillion.
• While the average return on investments was 3.6% - lower than these plans’ average long-term assumption of 6.5% - the underperformance of assets did not outstrip the PBO improvement. Only 19 of the Milliman 100 companies exceeded their expected returns. 
• According to Milliman, equities outperformed fixed-income investments for the sixth year in a row. Over the last five years, plans with consistently high allocations to fixed income have underperformed other plans but experienced lower funded ratio volatility. Since 2005, pension plan asset allocations have swung more heavily toward fixed income, away from equity allocations.

“Looking ahead, the economic volatility we’ve seen in 2025 plus the potential for declining interest rates likely means corporate plan sponsors will continue with de-risking strategies – whether that’s through an investment glide-path strategy, lump-sum window, or pension risk transfer,” said Zorast Wadia, co-author of the PFS. “But with about $45 billion of surplus in frozen Milliman 100 plans, there’s also the potential for balance sheet and cash savings by incorporating new defined benefit plan designs.” One can only hope, Zorast.

Final thought: Given the unique shape of today's Treasury yield curve, duration strategies may be challenged to reduce interest rate risk through an average duration or a few key rates. As a reminder, Cash Flow Matching (CFM) duration matches every month of the assignment. Use CFM for the next 10-years, you have 120 bespoke duration matches.