Asset/Liability Management

Liability Beta Portfolio™ (LBP)

Our Liability Beta Portfolio™ (LBP) is our proprietary cost optimization model that "cash flow matches" clients projected liability benefit payment schedules at the least cost and risk.

Our LBP shows consistent funding cost savings of about 2% per year (funding 1-10 years = 20%). Our LBP best represents the core portfolio of a pension plan.

Our Core Principles

Define

 

The primary objective of a pension is to secure and fund the projected benefit payment schedule in a cost-efficient manner. The secondary objective is to maximize the efficiency of the asset allocation.

De-Risk

 

To de-risk a pension requires the installation of a Liability Beta Portfolio™ (LBP).

The LBP will cash flow match and secure benefits chronologically as far out as the cash + bond allocation allows.

We recommend securing the next 10 years of net Retired Lives (projected benefits – projected contributions).  

Cash flow matching 10 years of liabilities creates a market volatility shield because it buys time for the performance (Alpha) assets  to perform.

Our LBP cash flow matching model is not interest rate sensitive because we are funding Future Values which do not change with interest rates. 

Optimize

 

“Cost Optimization” model whose mission is to calculate the lowest cost (present value) portfolio from an acceptable universe of bonds that can fund each and every projected monthly liability benefit payment. There are two factors at work here to reduce costs: Longer maturities have lower present values and usually higher yields (positive sloping yield curve) which both reduce the cost to buy bonds at the same par value (future value).

Reduce Costs

 

LBP reduces funding costs as proven by the cost difference between the future value of liabilities (projected benefits) minus the LBP cost (present value). Our LBP model is tested since 12/31/09 with a consistent cost savings of about 8%-15%.

Discount Rates

 

Ryan ALM can also provide the discount rates in conformity with FAS 158 (ASC 715) if needed. Our discount rates are consistently higher than other vendors. We show a range of 7 bps. to 35 bps. higher rates, which could enhance the balance sheet and funded ratio. Price Waterhouse Coopers (PWC) is our largest subscriber which should provide comfort to any client that we are in conformity with GAAP accounting.

Impact

 

Ryan ALM Liability Beta Portfolio™ (LBP) creates numerous benefits for clients:

1. Reduces risk
2. Secures Benefits
3. Reduces funding costs
4. Reduces volatility of funded ratio
5. Outyields liabilities by 50-125 bps
6. Enhances ROA by higher yields on LBP than current bond portfolio(s)
7. Eliminates interest rate risk since LBP funds future benefits (future values)
8. Buys time for Alpha assets to grow unencumbered (no dilution to fund benefits)

The LBP is the most prudent way to secure benefits, reduce risk and cost while buying time for the Alpha assets to grow unencumbered.