November 2004   

Asset / Liability Scoreboard


Index
Returns
YTD 2004
Estimated
Weights
  Liabilities :
     Market  (Treasury STRIPS)
     Pension Bill (Corporates)
     ROA      (8% constant rate)

   6.33 %
 11.28
   7.33
   100%
  Assets :
     Ryan Cash
     Lehman Aggregate
     S&P 500
     MSCI EAFE Intíl

     Asset Allocation Model

   1.04 %
   3.39
   7.23
 15.62
   6.22

5
30
60
5
100%
  Assets Ė Liabilities
     Market
     Pension Bill
     ROA

  -0.11 %
  -5.06
  -1.11
 

November saw a marked improvement in the asset/liability scoreboard for the calendar year. Through November, assets have underperformed liabilities by only -0.11% using market valuations (i.e. STRIPS); by -6.73% using the new Pension Bill valuation (moving average of three corporate indexes); and by -1.11% using the ASOP 27 methodology of a constant ROA. Using market valuations, the cumulative Asset/Liability deficit since December 1999 is now at -46.63% suggesting funding ratios below 60% for most pensions.

Total Returns
     2000       2001       2002       2003       2004   
  Pension Assets
-2.50
-5.40
-11.41
20.04
6.22
  Pension Liabilities  
25.96
3.08
19.47
1.96
6.33
           
  Difference
-28.46
- 8.48
-30.89
18.08
-0.11
  Cumulative
 
-34.53
-54.75
-46.57
-46.63

Ryan ALM Hires Ken Buffin, FSA as Consulting Actuary
It is with pride and excitement, Ryan ALM announces the hiring of Ken Buffin, Ph.D., FSA, FCA, FIA as our consulting actuary and head of our Liability Management Division. Ken has a long (33 years) and distinguished career as a pension actuary. His role will be to assist clients in addressing the pension crisis through implementation of appropriate investment strategies to achieve reductions in pension expense and funding requirements.

100% Bond Confusion
In my many seminar appearances, I (Ron Ryan) have occasionally been labeled as an advocate of 100% bonds for pension asset allocation. That is certainly not my position. I want to make sure that the pension industry understands my views on the appropriate use of bonds:

  1. Liabilities - I believe that FASB, SEC, IRS and ASOP all seem to agree that liabilities are to be priced as if they were a 100% high quality bond portfolio. It is liabilities (the objective) that behave like a 100% bond portfolio.

  2. Deficit - If a pension fund is in a deficit position, defeasing liabilities with 100% bonds would in essence lock in a deficit. The Ryan ALM strategy is to Buy Time! ... through a Liability Index Fund (bond matching strategy) for the time needed and push the deficit back into later years. Then Ryan ALM recommends a Portable Alpha strategy (PALS) by blending equities or other non-bond asset classes (Alpha Portfolio) to cure the deficit. Once corrected, the excess return is ported over to a Beta portfolio (bond matching portfolio) to secure the surplus. Indeed, this strategy is the key focus of Ryan ALM.

  3. Surplus - Congratulations! ...you are a rare pension plan today. Secure this surplus by using a bond matching strategy and remove the surplus to a second portfolio. This surplus portfolio should have its own unique objective and its own unique asset allocation (possibly 0% bonds).

In summary, my only promotion of 100% bonds is a proper benchmark on the liability side not the asset side.

Pension Solutions !
Ryan ALM will begin a series of Pension Solutions research papers.
We will alert you through our monthly newsletters with the first one coming this month called...  Pension Solution # 1    Custom Liability Index.

New Ryan ALM Address !
We have moved into an elegant midtown office at 46th street and Fifth Avenue. Our office was designed by the Italian decorator Rafael Saporiti. Please come see us at :

565 Fifth Avenue, 15th Floor, New York, NY 10017.
Our new phone number is... 646-254-7025.


Ryan ALM, Inc.
565 Fifth Ave.   15th Floor   New York, NY 10017     www.ryanalm.com     888-Ryan-ALM

 

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