Operation Home Run

Source: Operation Home Run

Pension Solution:Operation Home Run

The true objective of a pension is to secure and fully fund benefits in a cost-efficient manner with prudent risk. This is best accomplished through a cash flow matching (CFM) strategy using investment grade bonds to fully fund and match monthly benefit payments at low cost. CFM has several advantages of which we label four as “Operation Home Run”:

1.Liquidity

Liquidity is a critical and necessary priority of a pension since it must fund monthly benefits + expenses (B + E) on time. Many plan sponsors use a “cash sweep” or a cash allocation strategy to provide such cash flow. Both strategies are not optimal for a pension plan. A cash sweep usually takes income or cash flow from all asset classes to fund the current monthly B+E. This can severely damage the ROA of such asset classes. According to a research report by Guinness Global since 1940, dividends and dividends reinvested have accounted for 47% of the S&P 500 total return on a 10-year rolling period and 57% on a 20-year rolling period. So, this data questions the logic of a cash sweep that uses dividends to fund benefits + expenses (B+E). A cash allocation is usually low yielding + is close to a 1:1 relationship between present value and future value which is high cost. CFM will fully fund monthly B+E in a cost-efficient manner with yields of the average duration of the CFM.

2.Security

Pensions need to secure the benefit payments as a high priority. This is best accomplished through CFM which has the certainty of asset cash flows that fully fund liability cash flows on time with the correct amount. To our knowledge only bonds and annuities have certain cash flows. This is why bonds have been chosen as the appropriate securities to defease liability cash flows for decades.

3.Time

The greatest asset of a pension is time. Most pensions have long average lives. The best way to buy time is with a CFM strategy that will defease liabilities for as long a period of time as the plan sponsor wants. S&P data proves that the longer the time horizon the higher the total return of stocks… and most risky investments. Ryan ALM recommends a CFM strategy to fund at least 1-7 years.

4.Cost

The pension objective is a liability objective and cost objective. Since liabilities are future value costs, only a CFM or annuity strategy could fund liability cash flows with certainty. The Ryan ALM CFM model will reduce funding costs by about 2% per year (20% for 1-10 years of liabilities).

Conclusion

As a best-fit to achieve the true pension objective, Ryan ALM recommends our cash flow matching (CFM) strategy to fully fund B+E in a cost-efficient manner. Our CFM model will provide timely cash flows that will fully fund B+E at the lowest cost to our clients. The benefits of our CFM model are quite substantial:

• CFM will provide certainty of cash flows which eliminates liquidity risk.

• CFM secures the benefit payments through the certainty of its cash flows.

• CFM buys time. The longer the time, the greater the ROA for the growth assets.

• CFM is a cost optimization model that reduces funding costs by about 2% per year.

• CFM is an investment grade portfolio skewed to the longest maturities within the area it is funding (i.e. 1-5 years or 1-10 years) that should enhance the CFM yield versus the yield on cash reserves and active bond management.

• CFM reduces reinvestment risk if interest rates trend downward (as many expect).

As a solution, Ryan ALM recommends separating liquidity assets from growth assets in asset allocation. Let bonds in a CFM strategy be your liquidity assets for the advantages mentioned above. A CFM strategy will have a longer average duration and higher yield than cash thereby reducing the cost to fund B+E. In this way the liquidity assets and the growth assets are a team that will produce the optimal solutions.

How To De-risk a Pension

Source: How To De-risk a Pension

Risk is best defined as the “uncertainty” of meeting the client objective. The pension objective is to fund liabilities in a cost-effective manner such that contribution costs remain low and stable. Pension plans also want to de-risk their plans over time. The lowest risk assets for a pension are those that match the liability benefit payment schedule with certainty. By definition, Treasury zero-coupon bonds (STRIPS) and annuities would be the lowest risk assets for pension since they have a known future value… but they tend to come at a high cost since they are low yielding (STRIPS) or have high fees (annuities). Given that the pension objective is to secure benefit payments in a cost-efficient manner, then solving for cost while matching and fully funding the liability payment schedule would be the ideal way to de-risk a pension.

A pension liability benefit payment schedule is a term structure or yield curve often referred to as the liability cash flow. In order to match or de-risk each pension liability payment requires a matching cash flow from assets. Only bonds (and annuities) produce a certain cash flow. That is why bonds have been used for decades as the best way to defease, immunize, and de-risk a pension plan.

Problems with Hedges

Duration-matching strategies (Immunization), Interest Rate Swaps, futures, derivatives, risk overlays, etc. are all hedging tools to help assets match the liability growth rate. They are NOT de-risking strategies since they do not match the liability cash flows. Duration matching has several difficult, if not erroneous, data gathering choices it uses:

1. Average duration of liabilities
   Where do you get the average duration of liabilities? Most, if not all, actuarial reports do not provide this calculation. Moreover, they usually do not provide the projected liability benefit payment schedule which you would need to calculate duration. In addition, actuarial reports are, at a minimum, annual reports usually three to six months delinquent so there would be serious delayed information. The duration calculation is at a precise moment in time… like a balance sheet. As time and interest rates change… so will duration. Only A Custom Liability Index (CLI) based on each pension’s unique liability benefit payment schedule could provide an accurate and monthly duration profile.

2. Discount Rates
   Since the duration of liabilities changes with interest rates (discount rates) this calculation needs to be refreshed and updated on a frequent and accurate basis. According to pension accounting rules (FAS 158, GASB 67) and federal funding standards (PPA – MAP 21 and spot rates) there is an assortment of discount rates required to price liabilities. Which one is best? The FASB accounting language says it best… you are use a discount rate that settles the liability payments. This means discount rates you can buy to settle or defease the liability payment schedule. ASC 715 comes the closest by using an AA corporate bond yield curve. Treasury STRIPS would be ideal, but no one seems to favor this approach since STRIPS are low yielding causing the present value of liabilities to be higher. The yield difference in these discount rates could be significant. Any difference in yield creates a difference in the calculation of duration and liability growth rates.

3. Generic Bond Indexes
   A common proxy for the average duration of liabilities is to use a generic bond market index… usually the Barclay’s long corporate index. Such a proxy creates several erroneous data issues. This index has no bonds shorter than 10 years and no durations longer than 16 years. This certainly does not represent any pension liability schedule even if the average durations were similar. Accounting standards and actuarial practices price liabilities as a portfolio of zero-coupon bonds with a single average discount rate based on the present value of this zero-coupon liability portfolio. There are no generic bond indexes that use zero-coupon bonds as their portfolio. There are no generic bond indexes that use pension discount rates in accordance with FASB, GASB and PPA guidelines. Each pension plan’s liabilities are different and unique to that plan due to a different labor force, salaries, mortality, and plan amendments. There is no way any generic bond market index could represent any pension plan liability term structure.

   Only a Custom Liability Index could properly represent and measure any pension plan’s liabilities providing all of the critical data calculations needed to de-risk the plan. In 1991, Ron Ryan designed the first Custom Liability Index (CLI). Based on each client’s unique projected liability benefit payment schedule, Ryan ALM produces monthly CLI reports on:
   
   Structure (Present Value, Average Duration, YTM, Price, etc.)

   Growth Rate (Liability growth for month, year, and since inception)

   Interest Rate Sensitivity (PV change in % and $ given rate changes)

4. Interest Rate Sensitivity

   Every 1 year of duration difference between the liability proxy and the actual duration of each plan’s benefit payment schedule would represent a 1% mismatch in liability growth for every 100 bps of discount rate change. In truth, the duration mismatch is more likely to be three to five years rather than one year. Given that pension cost for the actuary, administration, asset managers, and consultant are usually less than 50 bps a year; such a duration mismatch could be very costly representing years of pension cost.

5. Funding Liabilities

   Imagine a 12-year average duration liability benefit payment schedule. It could have many different term structure shapes to come up with an average 12-year average duration. Imagine 100% of the assets in a 12-year duration bond portfolio. If interest rates rose 50 basis points in one-year, total assets and liabilities supposedly would both have a -6% price return (interest rate movement x duration (as a negative number). If they had the same income return = 5% they would match again. However, if the duration matching assets are used to fund liabilities as they come due then a -1% loss (-6% + 5% = -1%) on assets could be funding a short liability which will have a small positive growth rate. So, the assets could be taking a loss each year to fund the next liability payment if interest rates continue to rise. This could get to be a serious costly mismatch if interest rates continue their secular trend to higher rates for the next few years. But the point is……there is no cash flow match here, only a duration match so there is both a funding and interest rate risk!

6. Derivatives

   Interest rate swaps and futures are contracts not assets. There is no cash flow or funds available to make the liability cash flow payments. They are certainly NOT de-risking strategies but hedges vs. the liability growth rate. In fact, these strategies introduce more risk: counter party risk, interest rate risk, non-matching risk of assets purchased (usually equities) vs. liabilities, and leverage. In addition, interest rate swaps and futures have all of the problems associated with a liability proxy data gathering… as listed with duration matching.

Solution: Cash Flow Matching

As stated in the beginning, matching the liability benefit payment schedule (liability cash flow) at the lowest cost is the ideal way to de-risk a pension plan. Ryan ALM built a liability cash flow matching product, named the Liability Beta Portfolio™ (LBP), as a cost optimization model that matches the liability benefit payment schedule at the lowest cost given the investment policy restrictions of our clients.

The LBP provides about a 2% per year funding cost savings (1-15 years = 30%). This is a serious cost reduction and should be a major consideration of any de-risking strategy. Yes, the LBP model has some credit risk but very small since we are using investment grade corporate bonds with a credit filter (no bonds on negative watch list) plus the cost savings provides a large value-added cushion.

The funded ratio should dictate the allocation to bonds. A surplus should have a high allocation to bonds matched to liabilities and vice versa for a deficit funded status. Unfortunately, asset allocation did not respond to the surplus status in the 1990s which led to the US pension crisis. With funded ratios at 120% and above then, why didn’t pensions immunize and secure this victory? Amazingly, instead of increasing their bond allocation in response to a growing funded ratio they reduced it consistently because of low interest rates to the lowest bond allocations in modern history by 1999.

The allocation to bonds should determine how much of the liabilities we can cash flow match (i.e. a 25% bond allocation might fund the next seven years of gross liabilities). Ryan ALMrecommends: funding the next 10 years of Retired Lives on a net liability basis (after contributions). Indeed, current assets fund the net liabilities not the gross liabilities. Our LBP model will calculate with precision the cost to fund liabilities (gross or net) in a cost-effective manner either as a % of total liabilities or liabilities chronologically, as both methods will de-risk the plan gradually. There are advantages for each method.

Since liabilities are funded initially by contributions, using the LBP model to cash flow match net liabilities chronologically may be able to fund more liabilities than you think. Assume that a 20% bond allocation could match the next 10 years of net liability payments chronologically. Based on the Ryan ALM Liability Beta Portfolio™ (LBP) model we show a cost savings of about 20% on cash flow matching the first 10 years of liabilities, in this interest rate environment.

Matching liabilities chronologically should also buy time for the non-bond assets (Alpha assets) to perform and outgrow liabilities. Given time (7-10 years) most non-bond asset classes tend to outperform bonds. Since liabilities behave like bonds there is a high probability that non-bond asset classes could outperform vs. liability growth over an extended time horizon.

Since the pension objective is a cost focus, cash flow matching a % of total liabilities would produce the optimal cost savings since the longer the bond the less it costs given the same future value. Our LBP model is back tested since 2009. Every $1 billion in bonds used in our LBP model could save about $200 million in cost savings on a 1-10 year liability schedule and $400 million on a 1-20 year liability schedule.

Asset Allocation (AA)

Pension consultants and plan sponsors should consider installing an LBP as the core portfolio in asset allocation and as the liquidity assets to fund liability cash flows chronologically. The intrinsic value in bonds is the certainty of their cash flows. Bonds are usually not considered performance assets (Alpha assets) especially vs. pension liabilities which behave like bonds. Cash flow matching liabilities chronologically will buy time for the Alpha assets (non-bonds) to perform vs. liability growth, thereby enhancing the funded ratio. Such excess returns should be transferred over to the Liability Beta Portfolio™ (LBP) to de-risk more and more liabilities… Portable Alpha. Had this portable Alpha discipline been in place during the decade of the 1990s when funded ratios grew to their highest historical levels with true economic surpluses… there would be no U.S. pension crisis today!

Nota Bene (Note Well)

Please note that the definition of risk used in this article is in sharp contrast to the traditional approach produced by the Nobel Prize winner Ph.D. William F. Sharpe back in 1966. Professor Sharpe proposed that risk is the volatility of total returns and that the three-month T-Bill was the default risk-free rate. He developed the Sharpe Ratio as a means of calculating the risk-adjusted return by subtracting the return of the three-month T-Bill from the mean return of the asset(s) being analyzed and dividing the net return by the volatility of the return of the asset(s) in review. For many decades the Sharpe Ratio was the standard measurement of risk-adjusted returns. In 1994 Prof. Sharpe called me and invited me to Stanford to discuss our unique Custom Liability Index data and reports. I had the unique pleasure to meet and debate with one of the finest intellects I have ever met.

I proposed that risk is not a generic measurement but based on each client’s objective. I referenced pensions where every client’s liabilities are different (like snowflakes). As proof, I asked Professor Sharpe what is the risk-free asset for a 10-year liability payment? Professor Sharpe answered… a 10-year Treasury zero-coupon bond. Prof. Sharpe identified that the three-month T-Bill would have 39 reinvestment moments of uncertainty, so there is no way the three-month T-Bill could match a 10-year liability future value with any certainty and would become a risky asset. Our discussion led to Prof. Sharpe re-inventing the Sharpe Ratio in 1994 to include the benchmark objective instead of the three-month T-Bill in the numerator and denominator such that the average return of the asset portfolio is reduced by the average return of the objective (numerator). This net average return is then divided by the standard deviation of the asset portfolio excess return vs. the objective return. This is commonly called today… the Information Ratio.

Pension Quiz

Source: Pension Quiz

Is it better to have 10% ROA or reduce Funding Costs by 10%?

The primary objective of a pension is to secure benefits (Retired Lives) in a cost-efficient manner with prudent risk. The secondary objective is to enhance the funded status by maximizing the efficiency of asset allocation. However, most pensions have the stated objective as a… target absolute % return on assets (ROA).

Achieving a 10% ROA

History has proven that achieving the ROA does not mean you achieved a fully funded plan or even enhanced the funded status such that the $ deficit and contribution costs have been reduced. Simple math can prove this assertion as shown in Exhibit 1 where pension assets achieved the ROA growth target of 8% consistently for last 6 years. Liabilities are assumed to have the same 8% growth rate (actuarial discount rate = ROA). As a result, the funded ratio stays stable at 60% but the funded status $ deficit increases by 59.6% ($40 to 63.44) which would increase contribution costs accordingly. In order for contribution costs to remain stable or go lower, assets would have to match or outgrow liabilities by 5.33% annually (13.33% ROA minimum):

‍Exhibit 1
Funded Ratio = 60% ($40 Deficit)
Assets and Liabilities grow at ROA = 8%

Assets			Liabilities		Funded Status/Ratio
Year	Begin	End	Begin	End	$ Deficit	Funded Ratio
1	$60.00	$64.80	$100.00	$108.00	$43.20	60%
2	64.80	69.98	108.00	116.64	46.66	60%
3	69.98	75.58	116.64	125.97	50.39	60%
4	75.58	81.63	125.97	136.05	54.42	60%
5	81.63	88.16	136.05	146.93	58.77	60%
6	88.16	95.21	146.93	158.65	63.44	60%

If the actual asset growth rate was 10% instead of 8% (Exhibit 2), assets would grow to $106.29 over six years which creates a 67% funded ratio but a growing deficit of $52.36 or 30.9% greater than the initial $40 underfunding which increases contribution costs accordingly. Even a 70% funded ratio would increase the deficit to $45.91 or 14.78% greater. The pension return objective should be for assets to outgrow liabilities in economic dollars not actuarial dollars… it is relative $ returns that count not an absolute % return (ROA)! It is the economic funded status that counts not the funded ratio! Asset allocation needs to know the economic relative return needed to enhance the economic funded status.

Exhibit 2
Funded Ratio = 60% ($40 Deficit)
Assets grow at 10% but Liabilities grow at ROA = 8%

Assets			Liabilities		Funded Status/Ratio
Year	Begin	End	Begin	End	$ Deficit	Funded Ratio
1	$60.00	$66.00	$100.00	$108.00	$42.00	61%
2	64.80	72.60	108.00	116.64	44.04	62%
3	69.98	79.86	116.64	125.97	46.11	63%
4	75.58	87.85	125.97	136.05	48.19	65%
5	81.63	96.63	136.05	146.93	50.30	66%
6	88.16	106.29	146.93	158.65	52.36	67%

If we use market (economic) values for liabilities (ASC 715 discount rates), liabilities become highly interest rate sensitive… the economic truth. Using ASC 715 (AA corporates as a zero-coupon yield curve) as the discount rate for liabilities, a small increase in interest rates (+60 bp per year) would create negative growth in liabilities! Accordingly, any positive growth in assets would enhance the economic funded ratio and funded status. In just five years a 60% funded ratio could be 91% funded with just 5% asset growth while a 70% funded ratio would be 106% funded… and at no time did assets earn the ROA!

‍5-year Horizon
Liabilities ASC 715 Discount rate goes from 2.00% to 5.00%
Liabilities Growth Rate = (3.40%) at 12-year duration

	----- Annual Growth Rate -----
Assets	5.00%	6.00%	7.00%
Liabilities	-3.40%	-3.40%	-3.40%
Alpha (Annual)	8.40%	9.40%	10.40%
Funded Ratio @ 60% ...	91.0%	94.5%	100.1%
@ 70% ...	106.2%	111.4%	116.7%

Achieving a 10% Funding Cost Savings

The primary objective of a pension is to fund liabilities in a cost-effective manner. It is a liability objective with cost considerations. Since 1999, most pensions have been hard hit by spiking contribution costs which were unexpected and not a budget forecast. For many plan sponsors, the contribution cost has risen as much as 5x to 10x from the fiscal 1999 level. Such costs are a product of the size of the funded status deficit where asset $ growth did not match liability $ growth over time. Indeed, it is the relative $ growth of pension assets vs. liability $ growth that is critical… not the absolute % return on pension assets.

The pension objective is best achieved by separating the assets into liquidity (Beta) and growth (Alpha) assets. The job of the liability Beta (liquidity) assets is to secure benefits (Retired Lives) in a cost-efficient manner with prudent risk. This is best accomplished through cash flow matching net liabilities chronologically. Ryan ALM has built a liability cash flow matching product, named the Liability Beta Portfolio™ (LBP), as a cost optimization model that matches and funds the net liability benefit payment schedule (minus contributions) at the lowest cost given the investment policy restrictions of our clients.

Since liabilities are funded initially by contributions, using the LBP model to cash flow match net liabilities chronologically may be able to fund more liabilities than you think. Assume that a 15% bond allocation could cash flow match the next 10 years of net Retired Lives payments chronologically. Based on the Ryan ALM Liability Beta Portfolio™ (LBP) model we show a cost savings of about 8% to 15% on cash flow matching the first 10 years of liabilities versus the ASC 715 discount rates (AA corporate zero-coupon bonds). For every $100 million in bonds used in our LBP model could save about $10 million or 10% in funding cost savings vs. the projected net liabilities. This cost savings is received immediately upon implementation of the Liability Beta Portfolio™ rather than over several years as forecasted returns suggest would happen, if at all. This is a serious cost reduction that reduces the volatility of the funded status and contributions and should be a major consideration of any pension asset allocation as the core portfolio.

Matching liabilities chronologically should also buy time for the growth assets (Alpha assets) to perform and outgrow liabilities without being diluted or unencumbered to partially fund liabilities as is the case so often today. Given time (10 years) most non-bond asset classes tend to outperform bonds. Since liabilities behave like bonds there is a high probability that Alpha assets (i.e. equities) could outperform liability growth over an extended time horizon especially at today’s low yield on bonds (and liabilities).

Given time, equities (S&P 500) perform well. The more time you give equities… the better the returns. Below are historical average S&P 500 return measurements for rolling 10-year, 15-year and 20-year periods ending 12/31/19 over a 50-year horizon starting 1969. The table shows an average return of 7.75% for rolling 10-years, 8.00% for rolling 15-years and 8.31% for rolling 20-years. The table below also suggests how difficult it is to average a 10% return for any extended period of time… even 9.00% is not a proven performance attainment:

Best, worst, and average returns

Solution: BUY TIME!

So how do you buy time? The answer is… cash flow match liabilities

How do you buy time? Cash flow match liabilities for the time you need.for the time you need. We recommend funding net Retired Lives out 10-years or more chronologically as the historical equity returns document. Our cash flow matching model (Liability Beta Portfolio™ or LBP) will calculate with precision the cost to fund net liabilities + expenses in a cost-effective manner chronologically.for the time you need. We recommend funding net Retired Lives out 10-years or more chronologically as the historical equity returns document. Our cash flow matching model (Liability Beta Portfolio™ or LBP) will calculate with precision the cost to fund net liabilities + expenses in a cost-effective manner chronologically.

Benefits: Cash Flow Matching
Our LBP also has numerous benefits that enhance the pension plan:

Secures Benefits

• Cash flow match monthly Retired Lives benefits chronologically

Reduces Costs

• LBP reduces Contribution, Funding and Asset Management Costs:

• (LBP Fee = 15 bps… much less than most active bond managers)

Reduces Volatility

• Reduces volatility of Contributions and Funded Ratio

Reduces Risk

• Risk = Uncertainty of Funding Benefit Payments
  (LBP funds benefits with certainty)

• Projected Benefit Payments are Future Values

  (FV have NO Interest Rate Sensitive)

Enhances ROA

• LBP should out yield most active management bond portfolios

Buys Time

• LBP matches & funds liabilities chronologically

• Moves deficit out longer extending the investment horizon

• Buys Time for Non-bond assets (Alpha assets) to grow

• No dilution of Alpha assets to fund benefits

However, most bond allocations are for active bond management versus a generic index benchmark(s). As the designer of the Lehman bond indexes from my days as the Director of Fixed Income Research at Lehman, I can tell you unequivocally that generic bond indexes look nothing like a projected pension benefit payment schedule. Such a mismatch will distort the cash flows and risk/reward behavior of assets vs. liabilities. The major issues and differences are:

Bond Assets Managed Versus Generic Bond Indexes

• Does not fund benefits + expenses

• Aggregate Index = low yielding @ 1.42%

• Generic bond index =/= plan sponsor’s liabilities

• Cash flows do not match plan sponsor’s liabilities

• Index skewed to long bonds + Government securities

• Performance (value added) = small to none (after fees)

But the worst difference and discrepancy is… all about cash flows. Active bond management is usually focused on outperforming the returns of a generic bond index benchmark. As a result, cash flows are not a consideration. But no matter what generic bond index is chosen; the fixed income assets cannot produce enough income cash flow to fund benefits + expenses. As a result, bonds will require help from performance (Alpha) assets to fund benefits + expenses. This will create dilution and disruption of the growth rate of such performance assets. With the Liability Beta Portfolio™ in place as the core portfolio to fund the shorter Retired Lives net liabilities (1-10 years), the Alpha assets are now free to grow long-term without being diluted or unencumbered to pay any benefits. The example below shows the cash flow difference of bonds managed to a generic index versus cash flow matching to liabilities:

It’s All about Cash Flows!

Bond allocation = $150 million

Liabilities (Net Benefits + Expenses) = $20 million per year

Bond management vs. generic bond index

• YTM = 2.50%

• Income Cash flow = $3.75 million annual ($2.50% x $150m)

• Annual cash flow shortfall= $16.25 million ($20m - $3.75m)

• Requires dilution of Alpha assets cash flow to fully fund liabilities

Cash Flow Matching next 10 years

• YTM = 3.50% (skewed to A/BBB corporate bonds)

• Cash flow = $20 million annual (fully funds liabilities)

  (Cash flow includes principal + income + income reinvested)

• No dilution of Alpha assets (allowed to grow unencumbered)

Observations:

• Generic bond indexes cash flows look nothing like the projected benefit payment schedule of a pension

• This leads to mismatch of cash flows and risk/reward behaviors … serious issue over time

• Alpha assets need time to perform without any dilution of their cash flows to pay benefits

• Cash flow matching (Beta assets) matches plus funds benefit payments chronologically

• Cash flow matching will out yield current bond managers and enhance ROA

• Cash flow matching buys time for Alpha assets to grow unencumbered

Let the performance (Alpha) assets perform (grow) as the liquidity (Beta) assets provide cash flow sufficient to fund net benefits plus expenses. Pension consultants and plan sponsors should consider installing an LBP as the core portfolio in asset allocation. The best value in bonds is the certainty of their cash flows. Bonds are usually not considered performance assets especially vs. pension liabilities which behave like bonds. As the Alpha assets perform vs. liability growth, enhancing the funded ratio, such excess returns could be transferred over to the Liability Beta Portfolio™ (LBP) to fund and de-risk more liabilities… Portable Alpha. Had this Portable Alpha discipline been in place during the 1990s when funded ratios grew to their highest historical levels with true surpluses… there would be no U.S. pension crisis today!

Conclusion (Logic)

So, is it better to have a 10% cost savings that is immediate and certain with numerous benefits itemized in this report? Or is it better to have an uncertain 10% ROA in the future that may or may not enhance funding (could increase the deficit)?

10% cost savings = $100 million reduced funding costs per $1 billion

10% ROA = 60% funded ratio on $1b = $400m deficit that grows to $522.60m in 6 years or 30.7% higher contribution costs = $122.6m.

Compare: $122.6m more in costs vs. $100m cost savings!!!

I think the facts speak clearly that… cost savings is the better goal and better fit with the primary objective of a pension… but you can have both:

To achieve the primary and secondary pension objective:

Primary = cash flow match net Retired Lives chronologically (Beta assets)

Secondary = have asset growth > liability growth not % ROA (Alpha assets)