How Bonds Reduce the Cost to Fund Pensions

Written By Ronald J. Ryan, CFA - Chairman

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Ryan ALM believes that the true objective of any pension is to secure the promised benefits in a cost-efficient manner with prudent risk. Benefits are future value (FV) numbers calculated by the actuary as the liability cash flows (including administrative expenses). The most efficient and applicable strategy to secure benefits and fully fund the liability cash flows in a cost-efficient manner is cash flow matching (CFM). Bonds are the only asset class that has the certainty of its cash flows (FV numbers) through interest and principal at maturity.

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 (cash flow matching) was in vogue. Ryan ALM has built and maintains a cost optimization CFM model (Liability Beta Portfolio™ or LBP) that will fully fund monthly net liabilities ((benefits + expenses) – contributions or (B+E) – C) at the lowest cost to the client using an investment grade bond portfolio skewed to A/BBB+ corporate bonds. Bond math proves that the longer the maturity and the higher the yield… the lower the cost. The Ryan ALM CFM model solves the common and erroneous problems with funding liabilities:

  1. Ryan ALM calculates NET liabilities after contributions (not provided by actuary)

  2. Ryan ALM calculates MONTHLY liabilities (actuarial projections are ANNUAL)

  3. Ryan CFM model reduces funding costs by roughly 2% per year (1-10 years = 20%)
    Bond math proves that the longer the maturity and higher the yield… the lower the cost

  4. Ryan ALM CFM model skews weights to longest maturities in the area being funded

  5. Ryan ALM CFM model skews weights to A/BBB+ corporate bonds (higher yielding)

The benefits of the Ryan CFM model (Liability Beta Portfolio™ or LBP) are numerous:

  1. Reduces Funding Cost by about 2% per year (e.g. 1-10 years = 20%)

  2. Eliminates Liquidity Risk – LBP fully funds and matches monthly (B+E) - C

  3. Buys Time for growth assets to grow unencumbered thereby enhancing their ROA

  4. Eliminates Funding Risk - fully funds chronologically monthly B+E with certainty

  5. 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 or rkamp@ryanalm.com

Ronald J. Ryan, CFA - Chairman

Ron Ryan is Chairman and Founder of Ryan ALM, Inc., which he established in 2004 to help pension plans reduce cost and risk through liability-focused solutions. A pioneer in fixed-income indexing, Ron previously founded Ryan Labs and Ryan Financial Strategy Group and served as Director of Fixed Income Research at Lehman Brothers Kuhn Loeb, where he helped design many of the firm’s widely used bond indexes. His career has been recognized with numerous industry honors, including the William F. Sharpe Indexing Lifetime Achievement Award. Ron is also the author of The U.S. Pension Crisis and holds the CFA® designation, an MBA, and a BBA from Loyola University.

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