Asset-liability management improves Italian pension funds’ investment strategy

In Italy, some pensions are obligated to offer a capital guaranteed subfund to plan participants. While many participants see guaranteed subfunds as safe options, the investment may not meet their long-term retirement objectives. In this article, Milliman’s Dominic Clark highlights asset-liability management (ALM) analyses that were conducted for a large institutional Italian pension fund. The client’s main aims were twofold:

• To better understand the fit between asset allocation and expected future liabilities given the constraint of having to respect the capital guarantee of the guaranteed subfund.
• To better inform participants regarding the likely evolution of their account balances, and in particular, provide fund-specific projections that can help guide members in their choice of future contribution levels.

Tackling the challenges of traditional plan designs

Pension plan trustees are looking for more robust retirement solutions for the future to avoid the struggles many traditional pension plans have faced. They want to make their defined benefit pension plans less vulnerable to the risks inherent in retirement, but don’t want to change to defined contribution plans that offload these risks onto participants. Modified variable annuity plans, such as the Milliman Sustainable Income Plan™, could be a good option because they maintain plan funding and preserve contribution stability better than traditional designs. Milliman’s Kelly Coffing and Ladd Preppernau provide some perspective in this article.

July’s corporate pension funded status steady amid investment gains, discount rate decline

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In July, the funded status of these plans rose by $4 billion as the Milliman 100 PFI deficit shrank from $286 billion at the end of June to $282 billion at the end of July. The slight increase in funded status resulted from strong investment gains that compensated for a decrease in the benchmark corporate bond interest rates used to value pension liabilities. The funded ratio inched up from 83.5% the previous month to 83.7% as of July 31. Over the past seven months the funded ratio of these plans has been teetering between 83% and 84%.

Given the relatively strong market returns contrasted with persistently low interest rates, it’s no surprise that there’s been little movement this year in the funded ratio for the Milliman 100 plans. With the lack of funded ratio improvement, we’re seeing a number of sponsors make additional contributions with an eye towards shoring up funded status in the future.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.96% by the end of 2017 and 4.56% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 89% by the end of 2017 and 102% by the end of 2018. Under a pessimistic forecast (3.46% discount rate at the end of 2017 and 2.86% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 81% by the end of 2017 and 74% by the end of 2018.

To view the complete Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

Employee communication considerations for M&As

This blog post is the fifth in a series of six that will highlight considerations for and the impacts of employee benefit plans on mergers and acquisitions (M&A) transactions. Click here for additional blogs in this series. To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

What about me? That’s the number one question employees are thinking about when they hear the first whisper of M&A activity.

• Will I have a job?
• What will my benefits look like?
• I was on track for that promotion; what now?

In her blog post “Employee benefit plan considerations for M&As,” Cheryl Frost writes, “In addition, appropriate, well-timed communication is critical to talent management—the most critical asset in the deal. Retention of key management is sensitive and important. Communicating the strategic vision and benefits of the transaction to employees is a key component to the success of any transaction.”

An M&A is the time for more communication—not less. Communication efforts are often spent on getting the attention of employees. During times of change, you have their attention. Use it! This is a unique time to reaffirm the value of the total benefits package available to employees and their families. Promote your financial and health benefits. Remind them about the Employee Assistance Program. These are benefits that are available any time and may be particularly helpful during times of change.

Six tips for an effective M&A communication strategy
If you’re already communicating with your employees on an ongoing basis, you have the foundation on which to build an effective M&A communication strategy. Be sure you:

1. Communicate early and often. Change causes stress. And stressed employees can cause loss of productivity. So get in front of it! Even if you don’t know the answers, it’s OK to say that. Just let employees know when they can expect an update, and then follow through with it.

2. Know where you stand. If you are not sure how employees are feeling or what you need to communicate, review the data. Some indicators of employee stress or disengagement include:

• Higher call volume to human resources (HR) or vendor call centers
• Trends in your benefit claims
• Spikes in 401(k) loans
• An uptick in sick days
• More traffic to your website or specific searches

3. Control the message. Make sure employees get the news from you—not the media or the watercooler. Use every communication channel you have available and make sure the message is consistent. Consider a microsite devoted to M&A information, and update it regularly as more information becomes available or changes occur.

4. Listen. Whether this means town hall meetings, webinars, focus groups, or a simple, dedicated email address, give employees an outlet for questions. This simple act involves them in the process, builds buy-in, and allows you to adjust your communication strategy in response.

5. Use straight talk. Share the facts. Help employees understand the business perspective on what’s happening and why. Let people know what to expect and when, and avoid platitudes or promises.

6. Keep your managers informed. Managers are often the go-to source for employee questions. Make sure to arm employees with positioning statements, FAQs, and where they can go for more information.

A successful merger or acquisition is supported by a thoughtful, well-planned and executed communication strategy. Get your communication consultant involved from the beginning.

Regulatory roundup

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

DOL releases conflict of interest FAQ
The Department of Labor (DOL) has published “Conflict of Interest FAQs” (408b-2 Disclosure Transition Period, Recommendations to Increase Contributions and Plan Participation). This guidance, like the Fiduciary Rule and related exemptions, is generally limited to advice concerning investments in IRAs, ERISA-covered plans, and other plans covered by section 4975 of the Internal Revenue Code.

To download the FAQ, click here.

PBGC releases annual projections report
According to the Pension Benefit Guaranty Corporation’s FY 2016 Projections Report, the insurance program for multiemployer pension plans, which covers more than 10 million Americans, is likely to run out of money by the end of 2025.

Projections for PBGC’s insurance program for single-employer pension plans, which covers about 28 million people, show that its financial condition may continue to improve. The program is highly unlikely to run out of money in the next 10 years, and is likely to eliminate its deficit within the next three to seven years.

The Projections Report is PBGC’s annual actuarial evaluation of its future operations and financial status. The report provides a range of estimates of the future status of insured pension plans and their effect on PBGC’s financial condition, based on hundreds of different economic scenarios.

To read the entire report, click here.

Keeping track of pension participants

Monitoring the life status of pension plan participants and beneficiaries is an important fiduciary requirement. The inability to locate them can produce an administrative burden for plan sponsors. The latest DB Digest article, “Fiduciary responsibilities: Wanted dead or alive,” by Milliman’s Verna Brenner highlights three auditing strategies plan sponsors should consider to effectively track retirees.