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A "Joe Friday" Moment
By: Russ Kamp, CEO, Ryan ALM, Inc.
Jack Webb, who portrayed Joe Friday in the 1950s crime drama "Dragnet", was famous for saying in season two “all we want are the facts, ma’am.” The catchphrase eventually morphed into a shorter phrase with the help of comedian, Stan Freberg, who released his parody “St. George and the Dragonet" in which he stated, "just the facts, Ma'am". That phrase has been carried forward in Dragnet remakes. But, I digress.
Today, I present to you a Joe Friday moment. Here are the facts: Oil prices have risen by 27% since July 6th. U.S. Treasury yields are rising across the yield curve, and the 30-year Treasury yield is within 6 bps of this cycle's high of 5.2%. The 10-year Treasury yield is currently 4.66% as of 10:24 am on 7/22/26. Investment grade corporate bond spreads have finally started to widen although slowly. According to Morgan Stanley, the "average" yield on a BBB+ corporate is 6.23% or roughly 1.1% higher than the yield on the comparable 30-year Treasury bond. Inflation, which moderated in June, is likely to spike higher given the current direction of activity in the Middle East and its impact on shipping lanes.
These are the facts. They suggest to me, and hopefully you, that the current U.S. interest rate environment is ripe for de-risking activities through cash flow matching (CFM). Why continue to live with the uncertainty surrounding oil, inflation, rates, etc., when you can SECURE your fund's promises in the near-term?
I wish that I had a crystal ball to help me forecast the future but alas I don't, and I suspect that you don't either. Given the lack of clarity related to future events, I suggest that we live in the moment. We have an environment in which the cost of those future promises (benefit payments) can be cut dramatically. An environment that brings an element of certainty to a very uncertain process. An environment in which U.S. interest rates are providing plan sponsors with a significant portion of the annual return on investment target.
We've seen this scenario before. At the start of the 2000s, we had pension plans extremely well-funded and contribution expenses well-controlled. That opportunity went unheeded. The result of that inaction proved to be disastrous as we saw DB pension funding get pounded by two major equity market corrections. Are you confident that another major correction isn't around the corner?
Like Joe Friday, I rely on the facts, which I've now presented to you. Ignore them at your peril.
Milliman: Corporate Pension Funding at 25-Year High
By: Russ Kamp, CEO, Ryan ALM, Inc.
Ryan ALM, Inc. prides itself on providing pension sustainability solutions. Working with DB pension plans of all funding levels is what motivates and drives us. As a result, we pay close attention to the current funded status of Pension America. We greatly appreciate the work that Milliman does in providing monthly updates on the health of both private and public pensions.
We are pleased to share the output from the Milliman 100 Pension Funding Index (PFI), which, as a reminder, analyzes the 100 largest U.S. corporate pension plans. Given the strong rally in U.S. equities, it is not surprising to see that the collective funded status of the Milliman 100 PFI plans improved by $18 billion during May. As a result, the funded ratio rose from 108.2% as of April 30, to 109.6% as of May 31st. This represents the high water mark in pension funding since July 2001, when it stood at 109.9%.
Milliman also reported that plan liabilities also rose during the month, to $1.208 trillion, as the discount rate used to value those future promises fell 4 bps, to 5.62%. Fortunately, the growth in pension liabilities was not enough to offset investment gains of 2.22% for the cohort. The combined assets grew $22 billion during the month to $1.324 trillion, while the funded status surplus reached $116 billion.
“May’s robust returns pushed corporate pensions further into surplus territory, to a level not seen in nearly 25 years,” said Zorast Wadia, Milliman PFI author. “Plan sponsors that haven't yet pursued de-risking opportunities may want to review their options, as conditions remain highly favorable." We couldn't agree more with Zorast. Rising interest rates reduce the present value of those future promises. Defeasing pension liabilities at these rates will lock in the relationship of assets to liabilities.
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. Don't subject your pension plan to unnecessary market risk. You've worked too hard to get funding to this level.
Milliman: Corporate Pension Funding Highest Since 2007
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. It would be fascinating to see how these 100 plans differ from a list just 20-years ago.
As for today's members, the Milliman 100 PFI plans showed improved funding by $23 billion during April. These stellar results were driven by strong equity returns as the constituents averaged a 2.13% gain. As a result, the funded ratio dramatically improved from 105.9% at the end of March to 107.8% at the end of April representing the highest level of funding since October 2007, when it stood at 108.1%. Strong investment gains increased assets by $20 billion and now stand at $1.297 trillion, while the projected benefit obligation fell slightly to $1.204 trillion, as the monthly discount rate edged up one basis point, to 5.66% from 5.65%.
"After a flat first quarter, the funding surplus grew to $94 billion at the end of April, primarily due to strong market returns," said Zorast Wadia, author of the Milliman 100 PFI. "This means plan sponsors continue to have more pension risk management options as plans move further into surplus territory."
Plan sponsors would be wise to seek risk reducing strategies. The previous high watermark was achieved in October 2007, just prior to the start of the Great Financial Crisis, which pummeled markets through March of 2009. As the graph below highlights, the Milliman 100 went from a small surplus in the Q3'07 to a major deficit within 6 months. It would be another 13-years before a surplus was once again created.
Plan sponsors should secure the pension promises through a cash flow matching (CFM) strategy and then actively manage surplus assets since they've now created a much longer investing horizon for those assets. Ryan ALM, Inc. is always willing to provide a free analysis of what is possible through CFM.
For the full Milliman report, click on the link below.