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.

The Benefit of Higher U.S. Interest Rates

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

Rising interest rates can often create stresses in an economy and within the capital markets. They certainly make financing big ticket items more painful. They can destabilize equity markets, although it seems as if the current equity market is immune to any risk at this time. They harm most fixed income managers/strategies, as rising rates lower the present value of their bonds.

However, rising rates are GREAT for cash flow matching (CFM) strategies, as the higher rates reduce the cost of those future pension promises (benefit payments). We were recently asked by a public pension fund to provide them with an analysis of what CFM could potentially do for them in this environment. They provided us with the requisite data - projected benefits, expenses, and contributions as far into the future as possible - which we then ran through our cost optimization model that we call the Liability Beta Portfolio (LBP).

The output is compelling! We can secure this fund's net (after contributions) liabilities (all of them!) through September 30, 2053. The future value (FV) of those liabilities is $86.2 million. However, the plan needs to set aside only $50.1 million in present value (PV) assets to defease those liabilities with certainty. The $36.1 million cost reduction is locked in on the day that the portfolio is created. That "savings" equates to a cost reduction of 41.9%!

So, this plan sponsor can now SECURE pension payments for 27-years. The residual assets not needed in the CFM portfolio can now grow unencumbered. If I were them I'd just buy a S&P 500 ETF creating considerable savings from lower management fees and far less complexity. Furthermore, the plan sponsor now knows what contributions will look like for the next nearly three decades. They won't have to be alarmed should markets suffer a deep and extended correction, as the assets AND liabilities will move in lockstep.

By the way, these benefits were achieved without taking substantial risk, as our process only uses investment-grade corporate bonds rated BBB+ or better. Defaults, which are the only risk within the strategy, have been 0.2% (2/1000 bonds) annually for the last 40-years according to S&P.

Why use CFM? The benefits are incredible, including; certainty, security, all the necessary liquidity, an extended investing horizon, lower management fees, stable contributions, and improved sleep! If these benefits sound attractive to you, provide us the same info that our public fund prospect did (see above) and we'll provide you with a free analysis, too. We are confident that you'll be as blown away as they were and the many clients that we are proud to support.

Bonds as Performance Drivers? No, Sir!

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

U.S. fixed income benefitted tremendously from the nearly 4-decade decline in interest rates. From 1981 through 2021, the U.S. enjoyed a significant collapse in bond yields helping to fuel an unprecedented rally in risk assets. However, as Bob Dylan said, "the times they are a changin"!

The U.S. Federal Reserve's FOMC announced on March 16, 2022, that the new Fed Fund's target would be 0.25%-0.5% beginning on St. Patrick's day 2022. This action marked the beginning of a rate regime change resulting from Covid-19 implications, including abundant stimulus creating massive demand for goods and services that couldn't be met as production/manufacturing activities were disrupted.

The U.S. Fed Fund's rate would eventually rise to 5.25%-5.50% in July 2023 (following 11 rate increases). Today, the Fed Fund's rate stands at 3.5%-3.75%. For context, the average Fed Fund's rate since 1971 is 5.39%, which includes a peak of nearly 20% in December 1980, and ultimately 0% in December 2008, in reaction to the GFC. It would once again hit 0% during Covid.

As a result, bond investors, such as pension plans, have ridden a rollercoaster of performance. Performance looked terrific for much of the nearly 40-year bull market but has been challenging since the Fed's initial action in 2022. In fact, the Aggregate Index (Lehman, Barclays, Bloomberg, etc.) has produced only a 3.3% return for 20-years through March 2026. It is worse if you look at shorter timeframes, as the Index was up only 1.7% for 10-years, 0.3% for 5-years, and -0.1% YTD (all through March 31, 2026).

For pension plan sponsors and their advisors who are reluctant to utilize cash flow matching (CFM) as it might harm the pension plan's ability to achieve the ROA, those performance #s above should be a wake-up call! As a reminder, the YTM of a CFM portfolio is a good proxy for what the fund will achieve for the period that liabilities are defeased. Given that Ryan ALM, Inc. is currently generating a YTM of 5.02% for a client with a 30-year defeasement and a 4.6% YTM for another with a 10-year CFM mandate, which result do you think is more harmful to the pension plan?

Furthermore, the CFM portfolio's return is not predicated on the direction of interest rates, as it very much is with active core fixed income strategies. Importantly, CFM provides all the liquidity needed to meet the monthly benefit payments without having to sell assets, perhaps at inappropriate times. By cash flow matching bond principal and interest income with the plan's liability cash flows (benefits and expenses), CFM secures the pension promises and reduces the FV cost (with certainty) of those obligations in the process. For the client with the 30-year CFM mandate, we are reducing future funding costs by -31.1% and for the 10-year CFM program, we have reduced funding cost by -28.0%.

Where are we today? After a brief respite, U.S interest rates are once again trending higher, as greater inflation takes hold. Who knows where inflation and interest rates will eventually land, but a pension plan (or E&F) could benefit tremendously in this environment by engaging Ryan ALM, Inc. and our CFM capability. The 30-year Treasury bond yield history below highlights the rising rate environment. As a reminder, Ryan ALM builds CFM portfolios using investment-grade corporate that have yields substantially higher than comparable Treasury maturities.

So, I ask: Why sit with active fixed income and subject your plan's bond allocation to the whims of an unknown interest rate environment when you can SECURE the pension promise with near certainty (absent any defaults)? Wouldn't it be wonderful to know that your liquidity needs are all set for some prescribed period? Wouldn't your plan participants want to know that the promises given have been secured? Now is the time to bring an element of certainty to the management of pension assets that doesn't currently exist. Given the geopolitical uncertainty and the potential impact on inflation, rates, and other markets, creating funding certainty should be priority #1. Why isn't it?

Pension Plan Sponsor: "I Wish that I could..."

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

In October, I will celebrate my 45th year in the pension/investment industry. I've been truly blessed, but also frustrated by activities that I deem detrimental to the successful management of DB pension plans.

First and foremost, I believe that a majority of folks think that achieving the return on asset assumption (ROA) is the primary objective in managing a DB pension plan. This is an incorrect assumption! Creating an asset allocation targeted at a return only guarantees annual volatility, and NOT success.

Second, meeting monthly liquidity through the sweeping of interest, dividends, capital distributions, and worse, the selling of investments harms the long-term return of your fund.

Third, using core fixed income as a return generator is not a sound strategy, as bonds are highly interest rate sensitive, and who knows the future direction of rates.

That being said, if I were a pension plan sponsor, I'd wish that I could find an investment strategy that provided: All of the plan's liquidity needs, certainty for a portion of that plan, and a longer investment horizon for my alpha generating assets (non-bonds) so that I enhance the probability of achieving the desired outcome.

Great news - there is such a strategy. Cash Flow Matching (CFM) is designed to use investment-grade bonds for their cash flows of interest and principal (upon maturity) to match liability cash flows of benefits and expenses for as far out as the allocation goes. Furthermore, it extends the investing horizon for the non-bond assets so that they can wade successfully through choppy markets without being a source of liquidity. Finally, there is an element of certainty (minus that rare occurrence of an IG bond default) absent in the management of DB pension plans outside of a pension risk transfer (PRT) or an annuity.

I believe that the primary objective in managing a DB pension plan is to SECURE the pension promise at low cost and with prudent risk. Does focusing on the ROA secure benefits - no. The "sweeping" of dividends, interest, and capital distributions to meet ongoing liquidity needs can negatively impact the plan's long-term return. Guinness Global (U.K. investment shop) produced a study that said sweeping dividends and not reinvesting them reduced the return to the S&P 500 by 47% over 10-year periods back to 1940 and 57% for 20-year periods.

Finally, bonds are highly interest rate sensitive. After a nearly 40-year decline in U.S. interest rates which drove bond prices up and yields down, we have seen rates rise to more average levels where they are holding leading to very weak fixed income returns for recent performance periods. Matching asset cash flows with liability cash flows eliminates interest rate risk for that portion of the portfolio, as benefits and expenses are future values that are not interest rate sensitive. Furthermore, Ryan ALM's approach is to use 100% IG corporate bonds to build the CFM portfolio. A 100% IG portfolio will outperform a core active fixed income portfolio by the yield differential given the core portfolio's exposure to agencies and Treasuries.

Question: If you had the opportunity to bring some certainty to the management of pensions, why wouldn't you do it? If not, please share with us why not.