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The Pension Crisis 12/31/10 PowerPoint PPT Presentation


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The Pension Crisis 12/31/10. Ryan ALM, Inc. - The Solutions Company 1-888-RyanALM www.ryanalm.com. The Ryan Letter . Worst Cities / States Budget Deficits as a % of Budget Source: www.BusinessInsider.com. Pension Plan Objective ____________________.

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The Pension Crisis 12/31/10

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The pension crisis 12

The

Pension Crisis

12/31/10

Ryan ALM, Inc. - The Solutions Company1-888-RyanALM

www.ryanalm.com


The pension crisis 12

The Ryan Letter

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

  • Worst Cities / States Budget Deficits as a % of Budget

    Source: www.BusinessInsider.com

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Pension Plan Objective

____________________

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

  • Bad Pension Rules

    ________________

    Rules :Do NOT Mark to Market

    SMOOTH Assets over 5 years

    High Yield, Single Discount Rate for Liabilities

    Leads to :Wrong Funded Ratio Calculation

    Bad Asset Allocation Decisions

    Bad Contribution Decisions

    Bad Benefit Decisions

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Problem : Liability Valuation

_________________________

  • Single Discount Rate

  • Not market interest rates

  • (ASOP = ROA, PPA = 2 year weighted average)

  • Present Value calculated annually/triennially

  • (Months delinquent)

  • Liability Term Structure not transparent

  • (Short, Intermediate, Long, Very Long)

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

  • FAS 158

    _______

    Effective December 15, 2006

    Same as FAS 87 (Amended) and FAS 106 on Discount Rates:

    “The objective of selecting assumed discount rates is to measure

    the single amount that would provide the necessary future cash

    flows to pay the pension benefits when due. Notionally, that single

    amount, the projected benefit obligation would equal the current

    market value of a portfolio of high-quality zero coupon bonds

    whose maturity dates and amounts would be the same as the

    timing and amount of the expected future benefit payments”.

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

  • Pension Protection Act (PPA)

    _________________________

    Effective Calendar Year 2008

    Extends Pension Funding Act of 2004 thru 2007

    Discount Rate Methodology:

    • Modified Yield Curve

  • Hypothetical Corporate zero-coupon bonds

    Three interest rates (0-5, 5-20, 20+ years)

    Smoothed over 24 months

    Corridor of 90% to 110%

    2. Actual Spot Rates

    Real issues

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

  • GASB / ASOP 27

    ______________

    Section 3.6 Selecting an Investment Return Assumption

    and a Discount Rate

    “Generally, the appropriate discount rate is the same as the

    investment return assumption. But for some purposes, such as

    SFAS No. 87 or unfunded plan valuations, the discount rate may

    be selected independently of the plan’s investment return assumption”.

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Discount Rates (Public)

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Problem : Generic Indexes

_______________________

  • Represent the marketnot client liability schedule

    • Generic Indexes do NOT represent clients’ true objective

    • Client liability schedule is unique to each client (snowflakes)

    • Confucius : Given Wrong Index … Get Wrong Risk/Reward

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Asset Allocation

_____________

Should be based on Funded Ratio

(Market Value of Assets / MV of Liabilities)

Requires Custom Liability Index to Measure MV of Liabilities

Large Deficit = Different Asset Allocation than Small Deficit

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Performance Measurement

_______________________

Objective = Liability Driven

Beta Portfolio = Liability Index Fund

Alpha Portfolios = Portfolios that Beat Liabilities

Requires CLI to Measure Alpha and Manage Beta Portfolio

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Cash Flow

________

No Generic Index has same Cash Flow as Clients Liabilities

Lehman Aggregate

(12/31/06)

1-3 years 24.58%

3-5 years30.46

5-7 years27.09

7-10 years08.91

10+ years08.96

Lehman Aggregate = 40% in Securitized instruments

Cash flow behavior tends to move in wrong direction

Rates go up = duration gets longer

Cash flow gets reduced

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

  • No Alpha in Bonds

    ________________

    Total Returns

    (Periods Ending 12/31/08)

    • 10 yrs.20 yrs.

      Lehman Aggregate 5.63% 7.43%

      Ryan 5-year STRIPS 6.86% 8.39%

      Difference - 1.23% - 0.96%

      Ryan Liability Index 9.43% 11.17%

      Lehman Agg Duration consistently @ 5 years

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


The pension crisis 12

Ryan ALM, Inc.

The Solutions Company

1- 888-Ryan-ALM

www.RyanALM.com


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