What is the TRUE Pension Objective?
Ronald J. Ryan, CFA - Chairman
We at Ryan ALM believe that the true objective of any pension is to secure the promised benefits in a cost-efficient manner with prudent risk. But don’t take our word for it… let’s see what the top five public pensions say is their mission statement:
CalPERS = $563b
“Deliver retirement and health care benefits to members and their beneficiaries.”
CalSTRS = $370b
“Today, we are the largest educator-only pension fund in the world and continue to deliver on our mission – securing the financial future and sustaining the trust of California’s educators.”
NY State Common Retirement = $201b
“To put in place investment policies and practices designed to ensure that investments are made for the exclusive benefit of the participants and beneficiaries of the System, on whose behalf the assets of the fund are invested, and that Fund investments are made with care that a prudent person serving in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims – the “prudence” and “exclusive benefit” fiduciary standards of investment.”
NYC Retirement System, combined= $336b
“The prime function of the New York City Employees Retirement System is to administer the statutory pension benefits of its members, retirees and beneficiaries.”
FL Retirement System (FRS) = $168b
“To deliver a high quality, innovative and cost-effective retirement system.”
We seldom read that the mission or primary purpose of any pension is to earn a target return on assets (ROA) yet that is how most public pensions work when it comes to asset allocation. This misguided objective has created funding volatility and contribution spikes since 2000. At Ryan ALM, Inc., we believe that the primary objective in managing a pension fund is to SECURE the promised benefits at a reasonable cost and with prudent risk. Thus, the best strategy to achieve the true pension objective is through cash flow matching (CFM) with investment grade bonds. Only CFM provides the certainty of cash flows to match and fully fund the actuarial projection of the liability cash flows securing the promises made to the plan’s beneficiaries. As our name implies, Ryan ALM is an asset liability manager. We specialize in CFM… our only asset management product. Our expertise and experience began in the 1970s when Dedication was in vogue.
Ryan ALM has built and maintains a cost optimization CFM model that will fully fund net liabilities ((benefits + expenses) – contributions or (B+E) – C) at the lowest cost to the client using an investment grade bond portfolio. The Ryan ALM CFM model solves the common and erroneous problems with funding liabilities:
- Ryan ALM calculates NET liabilities after contributions (not provided by actuary)
- Ryan ALM calculates MONTHLY liability payments (actuarial projections are ANNUAL)
- Ryan CFM model reduces funding cost by roughly 2% per year (1-10 years = 20%)
Bond math proves that the longer the maturity and the higher the yield… the lower the cost
Ryan ALM CFM model skews weights to the longest maturities in the area being funded
Ryan ALM CFM model skews weights to A/BBB+ corporate bonds (higher yielding)
The benefits of the Ryan CFM model (called the Liability Beta Portfolio™ or LBP) are numerous:
- Eliminates Funding Risk - fully funds chronologically monthly B+E with certainty
- Reduces Funding Cost by about 2% per year (e.g. 1-10 years = 20%)
- Eliminates Liquidity Risk – LBP fully funds and matches monthly (B+E) - C
- Buys Time for growth assets to grow unencumbered thereby enhancing their ROA
- Eliminates need for “Cash Sweep” which significantly erodes ROA of growth assets
For more info on the Ryan ALM CFM model (Liability Beta Portfolio™)
Call Russ Kamp – CEO 201-675-8797 rkamp@ryanalm.com
“Given the wrong objective… you will get the wrong risk reward”