Is your Asset Allocation Responsive to your Funded Status?
Ronald J. Ryan, CFA - Chairman
According to the Milliman Public Fund Survey of 2025, funded ratios improved significantly from June 30, 2020, where the average funded ratio was 71.0% versus 88.7% as of June 30, 2026.
The prudent plan sponsor should want their asset allocation to be responsive to this marked improvement by shifting more assets to fixed income to de-risk the plan. This is best accomplished through cash flow matching (CFM) the pension plan’s liabilities. Yet according to the Milliman annual study, asset allocation has been static for the last 12 years, with little change in the fixed income allocation. In fact, instead of adding to fixed income, the exposure was slightly reduced over the years.
Asset allocation should be responsive to the funded status. This was the problem in 2000 – 2002 when pension plans had the highest funded ratios and asset allocation had the highest allocation to equities. Most public pensions did not respond and let the asset allocation ride. Las Vegas has built a most profitable empire based on the human behavior of letting winnings ride… which become big losses in time.
The solution is to reallocate your plan’s assets from equities to a fixed income strategy called “cash flow matching (CFM)”. CFM matches and fully funds liability cash flows (benefits and expenses) chronologically. This strategy secures benefits while buying time for the growth assets to perform. The higher the funded ratio the more you transition to CFM. This should be an annual asset allocation discipline or whenever there is a significant improvement in the funded status. Again, we believe that asset allocation should be Responsive to the funded status and not Strategic, which tends to be more static and ignores the funded status in pursuit of a ROA target return.
“Common sense is not common”