Pension Alert: Check your Glide Path
A pension glide-path strategy and discipline is supposed to be responsive to the funded status. As the funded ratio / status improves over time, asset allocation should respond by de-risking from a high allocation to risky assets to a more conservative fixed income allocation (ideally cash flow matching to secure the improved funded status). According to the Ryan ALM 2Q Newsletter, pension assets (based on a 5% Cash, 30% Bonds, 60% Stocks, 5% Int’l allocation) outperformed liabilities (Ryan ALM Liability Index of an equal-weighted Treasury STRIPS yield curve) by 6.3% so far in 2026. We calculated that this asset allocation starting at 100% funded at the end of 1999 has risen significantly to 140% funded ratio as of 6/30/26. Our static asset allocation is quite conservative. Most, if not all, pensions moved into a more aggressive and risky asset allocation over the last 25 years. Since 1999 most bond allocations have been reduced with a growing allocation to hedge funds and alternative investments (mainly private equity).
Although the true objective of pensions is to fully fund benefits in a cost-efficient manner with prudent risk, most pensions are focused on earning a target rate of return (ROA hurdle rate) which ignores the funded status and securing benefits. Today’s growing surplus funded status position reminds me of what happened in the early 2000s when pensions had a growing surplus and let it ride instead of securing benefits through a cash flow matching strategy (i.e. Dedication). The S&P 500 correction of 2000 – 02 sent funded ratios to a quick and deep deficit with spiking contributions as a result. According to the Ryan ALM Newsletter our calculated funded ratio went from 100% in 1999 to 77.4% in 2000 then down to 59.2% by 2005 and 53.8% in 2010.
Many feel that the US stock market today is overvalued. Perhaps, the average P/E multiple is a sign of this overvaluation. The current P/E multiple = 32.45x while the average P/E multiple since 1990 is around 24.6x:
Another sign of this overvaluation of our equity market is the notion of “Reversion to the Mean” that suggests that the future valuation of the equity market should resemble or be valued at a long-term moving average. Based on a series of moving averages would suggest that the future average return of the S&P 500 would have to be lower than in recent years. The return for YTD 2026 through June is 10.2%. Annual + Average Returns of the S&P 500 as of June 30, 2026:
Years | Average |
2022 | -18.1% |
2023 | 26.3% |
2024 | 25.0% |
2025 | 17.9% |
2026 YTD | 10.2% |
5 | 13.4% |
10 | 15.5% |
20 | 11.4% |
Ryan ALM urges plan sponsors to follow the true objective of their pension and be responsive to the greatly improved funded status of today. We strongly recommend a higher allocation to fixed income using a cash flow matching (CFM) strategy. Our CFM model (Liability Beta Portfolio™) is designed to secure benefits in a cost-efficient manner where cost savings of 2% per year (1-20 years = 40%) can be achieved. Our CFM model will buy time for the risky assets to grow unencumbered (no cash sweep). The high P/E valuations of today suggest an equity correction is due. Let’s not repeat the major funded status erosion of the early 2000s.
“Common sense is not common”
Ron Ryan