Public pension funding improves by $36 billion in Q3

Milliman today released the third quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q3 2017, these plans experienced a $36 billion improvement as a result of strong investment performance. In aggregate, these plans saw investment returns of 2.97%, with a spread ranging from a low of 1.63% to a high of 3.83%. The funded status of the Milliman 100 PPFI climbed from 70.7% at the end of June to 71.6% as of September 30.

These plans are moving in the right direction, with two more crossing the 90% funded mark in Q3, bringing the total to 16 plans with 90% funding or above. But that progress is hampered as plan sponsors reduce their interest rate assumptions to reflect current market expectations – something one-third of the plans in this study have done in their latest reported fiscal year.

The Milliman 100 PPFI total pension liability (TPL) increased from $4.871 trillion at the end of Q2 to an estimated $4.908 trillion at the end of Q3. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees. Asset values for these plans have increased from $3.443 trillion to $3.517 trillion during the same time period; and while investments brought in approximately $102 billion, the plans collectively paid out $28 billion more in benefits than they took in from contributions.

To view the Milliman 100 Public Pension Funding Index, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Global equities extend their positive streak to thirteen consecutive months

The end of 2017 will cap off the third decade of performance for the MSCI ACWI Index. Never before has it entered December with a chance to notch a full calendar year of positive monthly returns. This year it heads into December with plenty of momentum, up 23% year-to-date and with a record 13 consecutive months of positive returns.

The latest Milliman FRM Market Commentary by Joe Becker, Adam Schenck, and Jeff Greco reviews more monthly results from the financial markets. To download the report visit MRIC.com.

Corporate pension funding up $7 billion in November, $41 billion in past three months

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In November, these pensions experienced a $7 billion improvement, increasing for the third month in a row and bringing the total funded status gain to $41 billion since August 31. This three-month run marks the strongest performing period of 2017.

November’s improvement was the result of robust 0.82% investment gains and pension plan liabilities that remained stagnant as the corporate bond interest rate used to value those liabilities was flat for the month. The funded ratio for the Milliman 100 plans ticked up 0.4% to 85.2% as of November 30.

Barring a calamity in the next month, 2017 has been a stellar year with strong double-digit investment returns for corporate pensions. If discount rates can hold and December investment returns mirror the past 11 months, the funded ratio for these plans will end higher than it was in 2016. Should discount rates end the year with a strong uptick, this will result in more funding optimism as we turn the corner into the new year.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.32% by the end of 2018 and 4.92% by the end of 2019) and asset gains (11.0% annual returns), the funded ratio would climb to 99% by the end of 2018 and 115% by the end of 2019. Under a pessimistic forecast (3.02% discount rate at the end of 2018 and 2.42% by the end of 2019 and 3.0% annual returns), the funded ratio would decline to 78% by the end of 2018 and 71% by the end of 2019.

To view the complete Pension Funding Index, click here. To see the 2017 Milliman Pension Funding Study, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Should DB plan sponsors sign up for paperless records management?

There are several pros and cons for defined benefit (DB) plan sponsors to consider before moving to a paperless records management system. The DB digest article “Paper records: Can we shred them yet?” by Milliman’s Stephanie Sorenson explores the advantages of converting to a paperless system. In the article, Stephanie also discusses the regulatory guidelines and administrative questions plan sponsors need to think about before making such a conversion.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

Report shows Senate tax bill will yield a 10-year revenue loss of $1 trillion
The Joint Committee on Taxation (JCT) published a new analysis indicating that the Senate tax bill would generate enough economic growth to lower its $1.4 trillion revenue cost by only about $458 billion over a decade. After accounting for interest rates, the growth figure would fall to $407 billion, said the JCT. That would leave a 10-year revenue loss of roughly $1 trillion.

To download the report, click here.

Fiduciary rule extended
The Department of Labor (DOL) has extended for 18 months the special transition period under Sections II and IX of the Best Interest Contract Exemption and Section VII of the Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs.

The document also delays the applicability of certain amendments to Prohibited Transaction Exemption 84-24 for the same period. The primary purpose of the amendments is to give the DOL the time necessary to consider public comments under the criteria set forth in the presidential memorandum of February 3, 2017, including whether possible changes and alternatives to these exemptions would be appropriate in light of the current comment record and potential input from, and action by, the U.S. Securities and Exchange Commission (SEC) and state insurance commissioners.

For more information, click here.

DOL’s Office of Inspector General releases Semiannual Report to Congress
Regarding the Employee Benefits Security Administration (EBSA), the Office of Inspector General (OIG) notes it remains concerned with the DOL’s ability to administer and enforce ERISA requirements that protect the benefit plans of approximately 149 million plan participants and beneficiaries, particularly in light of statutory limitations on DOL’s authority.

One challenge facing the EBSA for decades has been that ERISA allows billions in pension assets held in otherwise regulated entities, such as banks, to escape full audit scrutiny. These concerns were renewed by recent audit findings that as much as $3.3 trillion in pension assets, including an estimated $800 billion in hard-to-value alternative investments, received limited-scope audits that provided few assurances to participants regarding the financial health of their plans.

To download the OIG report click here.

Social Security adjusts taxable wage base and related figures for 2018

On November 27, the Social Security Administration (SSA) updated the 2018 taxable maximum amount, based on a national payroll service provider’s corrected Internal Revenue Service (IRS) Forms W-2 (Wage and Tax Statement) provided to the agency in late October 2017, after the SSA announced cost-of-living adjustments (COLAs) for 2018. The new data lowers the national average wage index for 2016, which in turn reduces the 2018 Social Security taxable maximum amount (also known as the taxable wage base or the contribution and benefit base), the primary insurance amount (PIA) bend points used to calculate benefits, and the family maximum bend points.

The adjusted figures are:

• The 2018 Social Security taxable wage base: $128,400 (corrected from $128,700).
• The 2018 PIA bend points that are used to determine individual beneficiaries’ Average Index Monthly Earnings (AIME): $895 and $5,397 (corrected from $896 and $5,399). Thus, the monthly PIA formula will be 90% of the first $895 of AIME, plus 32% of the AIME over $895 and through $5,397, plus 15% of the AIME over $5,397.
• The 2018 bend points in the family maximum formula: $1,144/$1,651/$2,154 (corrected from $1,145/$1,652/$2,155).
• The 2016 national average wage index: $48,642.15 (corrected from $48,664.73).

Milliman has posted a revised Client Action Bulletin (CAB 17-4R) to reflect the Social Security Administration’s adjusted figures.

For additional information about the 2018 updated Social Security figures, please contact your Milliman consultant.