1. Ryan ALM, Inc. - The Solutions Company 1-888-RyanALM
The Pension Crisis
Ryan ALM, Inc. - The Solutions Company RyanALM

2. (Copyright Ryan ALM, Inc. 2011 …All Rights Reserved)
Index
Returns YTD 2011
Estimated
Weights
Liabilities :
Market (Tsy STRIPS)
FAS 158 (AA Corporates)
PPA (3 Segment)
PPA (Spot Rates)
GASB /ASOP (8% ROA)
33.77 %
19.58
14.56
18.93
8.16
100 %
Assets :
Ryan Cash
Lehman (Barclay)Aggregate
S&P 500
MSCI EAFE Int’l
Asset Allocation Model
0.31 %
7.85
2.10
-11.68
5 % 30 60 5
3.27 %
Assets – Liabilities
Market
FAS 158
PPA (3 Segment)
PPA (Spot Rates) GASB/ASOP (8% ROA) %
(Copyright Ryan ALM, Inc …All Rights Reserved)
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

3. Total Returns
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Assets
-2.50
-5.40
-11.41
20.04
8.92
4.43
12.25
6.82
-24.47
19.43
11.89
3.27
Liabilities
25.96
3.08
19.47
1.96
9.35
8.87
0.81
11.76
33.93
-19.52
10.13
33.77
Difference:
Annual
-28.46
-8.48
-30.89
18.08
-0.43
-4.44
11.44
-4.94
-58.40
38.95
1.76
-30.50
Cumulative
-37.60
-73.40
-60.08
-66.13
-76.75
-64.60
-78.38
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

4. 4

5. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

6. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

7. Actuarial Gain/Loss ___________________
Actual Return on Assets - ROA Forecast
____________________________________
Average Life of Pension (Duration)
Actuarial Gain/Loss = Goes directly to EPS
Since 12/31/99 = Heavy hit to EPS
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

8. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

9. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

10. 10

11. NYCERS Actuarial Report _______________________
“The financial objective of the New York City Employees Retirement System is to fund members’ retirement benefits during their active service and to establish employer normal contribution rates that, expressed as a percentage of active member annualized covered payroll, would remain approximately level over the future working lifetimes of those active members and together with members’ contributions and investment income, would ultimately be sufficient to accumulate assets to pay benefits when due.”
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

12. 12

13. Problem : Liability Valuation _________________________
Single Discount Rate
Not market interest rates
(GASB, 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
Ryan-ALM

14. Problem : ROA (Return On Asset) ______________________________
FASB = Offset to Pension Cost (Actuarial G/L)
GASB = Discount Rate on Liabilities
Significantly undervalues liabilities
ROA = 8%
Long Treasury = 3%
Yield Difference = 5%
Yield Difference x Duration = PV $ Difference
5% x years = 50% to 75% error
Used as Hurdle Rate for assets
Asset Allocation models used to validate ROA
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

15. ROA and Contributions
____________________________________________________________
ROA = Growth rate used to calculate Contributions (ONLY value)
Contribution = Asset $ Growth – Liability $ Growth (if negative)
Example: Funded Ratio = 60% (40% Deficit)
Growth Rate = 8% ROA Contribution
Assets $ Growth Liabilities $ Growth $ Cost % Increase
Year $ $ $ $ $ 3.20
Year %
Year
Year
Year
Year
Note: Requires an ROA = % to not increase Contribution costs
Assets > Liability growth by 5.33% per year (Level Contributions)

16. ROA and Contributions
____________________________________________________________
ROA = Growth rate used to calculate Contributions (ONLY value)
Contribution = Asset $ Growth – Liability $ Growth (if negative)
Example: Funded Ratio = 140% (40% Surplus)
Growth Rate = 8% ROA Contribution
Assets $ Growth Liabilities $ Growth $ Cost % Increase Year $ $ $ $ $ NA Year NA
Year NA
Year NA
Year NA
Year NA
Note: Requires an ROA = 5.72% for NO Contribution costs
Assets < Liability growth by -2.28% per year (NO Contribution)
Surplus Strategy: Immunize… Asset Growth = Liability Growth (NO Contribution)

17. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

18. 18

19. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

20. Asset Allocation ________________
Based on “Funded Ratio” (Assets/Liabilities)
Separate Assets into Beta Assets and Alpha Assets
Requires Custom Liability Index to Measure MV of Liabilities
Large Deficit = Different Asset Allocation than Small Deficit
Should be Responsive (Dynamic or Tactical)
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

21. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

22. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

23. Contributions ____________
Contributions = Asset growth – Liability growth (if negative) Contributions = used to fund Liabilities Current Assets fund net Liabilities Enhances Funded Ratio
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

24. Asset Allocation _____________
Market Value of Assets $ ,000,000
Market Value of Liabilities $ 1,000,000,000
Funded Ratio %
Contributions (present value) $ ,000,000
e. Net Liabilities $ ,000,000
f. Net Funded Ratio %
Net Deficit
= Annual Target Alpha
Duration of Liabilities
30%
= 2.5% Annual Target Alpha
12 years
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

25. Asset Allocation _____________
g. Annual Target Alpha = 2.5%
h. YTM of Custom Liability Index (CLI) = 3.0%
i. ROA of Alpha assets = 7.00%
Annual Target Alpha / (ROA – YTM of CLI) = Allocation to Alpha assets
2.5% / (7.00% %) = 2.5% / 4.00% = 62.5% Alpha Allocation
100% - Alpha Allocation = Beta Allocation = 37.5%
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

26. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

27. Solution: Portable Alpha
___________________________
Transfer (Port) Excess Returns above Objective Index
from Alpha Portfolio(s)
to Beta Portfolio
Requires Custom Liability Index = Liability Objective
Beta Portfolio = matches and funds Liabilities
Secures Victory! Reduces Funded Ratio Volatility!
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

28. Portable Alpha (Benefits) ___________
As Portable Alpha Transfers Excess Returns above Liability Index
Beta Portfolio grows and grows… creating 4 Major Benefits :
1. Reduces Contribution Costs (Fully Funds Liabilities)
2. Reduces Interest Rate Risks (Hedges Liabilities)
Increases Funded Ratio (Client Objective)
Increases Certainty of Meeting Objective
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

29. Solution: Rates Go Up (5 Years) _______________________________ Liabilities: Interest Rates go up (+80 bps per year) 30-yr U.S. Treasury = 3.00% >> 7.00% Growth Rate = ( 5.00%) Annual Note: Liabilities behave like long bonds Annual Growth Rate Assets 5% 6% 7% 8% Liabilities - 5% -5% - 5% - 5% Alpha (Annual) 10% 11% 12% 13% Funding Ratio = 50% 89% 94% 98% 103% 60% 101% 109% 115% 120%
ns Company
Ryan-ALM

30. Solution: Liability Alpha _____________________
Focus: Funded Ratio not the ROA
Asset Growth > Liability Growth
Example: Funded Ratio = 60%
Asset Growth = 6% Liability Growth = - 5%
Assets outgrow Liabilities by 11% per year (Alpha)
Assets Liabilities Funded Ratio Contribution
Start $ $ % $3.20
Year $ $ % $2.41
Year $ $ % $1.64
Year $ $ % $1.03
Year $ $ % $0.43
Year $ $ % NA
Note: Contribution calculated on Asset/Liability Growth = 8% (ROA)

31. Performance Measurement _______________________   
Compares Assets vs. Objective
Objective = Custom Liability Index
Requires CLI to Measure Performance vs. Liabilities
Requires CLI to measure RISK and ALPHA
Ryan ALM, Inc.
The Solutions Company
Ryan-ALM

32. 32

33. Ryan ALM, Inc.
The Solutions Company
Ryan-ALM