Corporate pension contributions reach record-level in 2017, funding status improved to 86.0%

Milliman today released the results of its 2018 Corporate Pension Funding Study (PFS), which analyzes the 100 largest U.S. corporate pension plans. Overall, this year’s study found that in 2017 corporate pension contributions hit $62 billion, tying the amount contributed in 2012 for the highest contributions since the inception of the PFS. Seventeen employers contributed at least $1 billion to their plans, with seven of them contributing more than $2 billion.

There were incentives to increase contributions in 2017. Additional contributions can both reduce the PBGC premiums paid by these plans, and allow them to leverage higher tax deductions in light of tax reform enacted at the end of 2017. It’s a trend that’s likely to flourish in 2018, as plan sponsors with calendar year plans can continue to leverage those higher 2017 tax deductions with contributions made prior to September 15 of this year.

The funded ratio for the Milliman 100 plans rose from 81.1% in 2016 to 86.0% in 2017, an increase due largely to strong investment returns coupled with a modest decline in life expectancy assumptions, and the higher level of plan contributions as noted above. Funding ratios for plans ranged from a low of 62.4% for American Airlines to a high of 155.0% for NextEra Energy, Inc.

Other key highlights from the 2018 study include:

Analysis of asset gains. Strong investment returns added $175 billion to the Milliman 100 plans, with a 12.7% rate of return (compared to an expected investment return of 6.8%). Pension assets for the Milliman 100 plans increased to an all-time high of $1.55 trillion.

Analysis of discount rate and pension liabilities. The median discount rate as of year-end 2017 declined to 3.60%, down 37 basis points from 3.97% the year before. Pension liabilities for the Milliman 100 plans increased to an all-time high of $1.80 trillion.

Pension Risk Transfer (PRT) market matures. The 2017 PRT activity for the Milliman 100 plans was slightly smaller than in 2016, with an estimated $12.7 billion in reported dollar volume.

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

Mortality table assumption decision for single employer pension plans

Last fall, the Internal Revenue Service (IRS) issued regulations requiring an update to new mortality tables for valuing monthly annuities for minimum funding requirement purposes. The requirement went into effect beginning with the 2018 plan year, unless the new tables would cause “more than a minimal adverse business impact” or “more than a minimal administrative burden.” In that case, the new tables would be required beginning with the 2019 plan year. Plan sponsors also have the option to create their own mortality tables (see the blog “Plan-specific substitute mortality tables” for more information on this option).

The new tables are estimated to increase a typical plan’s liabilities by about 2% to 5%. The tables chosen for minimum funding would also be used for determining other plan measures such as benefit restrictions, Pension Benefit Guaranty Corporation (PBGC) variable premiums, the PBGC 4010 filing test, the quarterly contribution exemption test, the funding credit usage test, and the at-risk plan test.

The IRS has not issued any formal guidance on what constitutes meeting the above criteria required for deferring the new tables until the 2019 plan year. Therefore, plan sponsors are left to make their own judgments based on their individual facts and circumstances. A decision to delay the new tables until the 2019 plan year will likely need to be disclosed on the 2018 plan year Form 5500 filing, so plan sponsors will want to carefully document their reasons for maintaining the older mortality tables for an additional year.

Notwithstanding a decision to defer using the new mortality tables for valuing annuities until the 2019 plan year, plans that offer and value a lump-sum option for minimum funding purposes will still be required to use the new tables for valuing lump sums for the 2018 plan year (see the blog “Updated mortality tables for DB plan lump-sum payments starting in 2018” for more details on lump-sum mortality table requirements).

Milliman FRM Market Commentary: March 2018

March validated February’s initiation of a new, higher volatility regime. In this month’s commentary, Milliman’s Joe Becker addresses the following:

• March capped off the S&P 500’s first negative quarterly return since Q3 2015 and the first negative Q1 since 2009.
• After not experiencing a single daily move of more than 2% through all of 2017, the S&P 500 has now seen 6 such moves through February and March.
• If “taper tantrum” was an fitting moniker for the 2013 reaction to the prospect of ending the Fed’s QE, the volatility in early 2018 might well be referred to as the “tightening, tech, trade-tariff tantrum,” as markets reacted to tighter monetary policy, a data breach at Facebook and the prospect of a tariff-induced trade war.
• While not as high as it was in February, volatility in March was still above its five-year average and much higher than it was in 2017.
• Falling interest rates boosted the U.S. Aggregate bond market, reducing its correlation to equities and improving it as a diversifier, while the correlation between U.S. and foreign equities increased.

To learn more, download the full commentary at MRIC.com.

Regulatory roundup

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

Comments requested regarding potential expansion of determination letter program for individually designed plans
The IRS released Notice 2018-24, requesting comments on the potential expansion of the scope of the determination letter program for individually designed plans during the 2019 calendar year, beyond provision of determination letters for initial qualification and qualification upon plan termination.

In reviewing comments submitted in response to this notice, the Department of the Treasury, the IRS will consider the factors regarding the scope of the determination letter program set forth in section 4.03(3) of Revenue Procedure 2016-37, 2016-29 I.R.B. 136. The Treasury Department and the IRS will issue guidance if they identify any additional types of plans for which plan sponsors may request determination letters during the 2019 calendar year. Comments are due to the IRS by June 4, 2018.

For more information, click here.

PBGC releases data tables for single-employer and multiemployer pension plans
The Pension Benefit Guaranty Corporation (PBGC) has published the first installment of tables for the 2016 Data Book. Information in the claims and summary tables has been updated.

For more information, click here.

IRS issues tax withholding and estimated tax publication
The IRS released Publication 505, Tax Withholding and Estimated Tax, for use by employees to determine how much income an employer should withhold for tax payments.

The publication had been referenced by IRS as a key resource for employees to use when deciding on allowance amounts to apply on Form W-4, Employee’s Withholding Allowance Certificate. Form W-4, used by employers in calculating withheld tax amounts, was updated to reflect changes under the new tax law (Pub. L. 115-97). Forms W-4 are completed by employees to inform employers of marital status and the number of withholding allowances to be claimed for federal income tax purposes. The amount of one withholding allowance on an annual basis increased to $4,150 in 2018 from $4,050 in 2017.

For more information, click here.

Guidance for multiemployer plan alternative terms and conditions to satisfy withdrawal liability
The PBGC has issued guidance on alternative terms and conditions that multiemployer plans can use to satisfy withdrawal liability claims. The guidance describes the types of information PBGC finds helpful in evaluating plan proposals, and the factors the agency considers in its evaluation.

For more information, click here.

International M&A deals can benefit from independent actuarial valuations

A Milliman client, a global information technology (IT) company, acquired an operation in Spain. Along with the acquisition came the operation’s local retirement program, with its associated assets and liabilities, including a defined benefit (DB) pension obligation.

As part of the acquisition process, an actuary—appointed by the seller—carried out an actuarial valuation of the existing local retirement liability. Not long after the acquisition, the company asked Milliman to carry out the actuarial valuations for accounting purposes, covering operations in several countries.

To read more about the work Milliman did—and to learn why expert international actuarial advice is so important for successful global M&A deals—see Dominic Clark’s article here.

Bitcoin considerations for retirement plan sponsors

Bitcoin is a digital “currency” or cryptocurrency not tied to a sovereign or bank. It is mainly a tool for transactions (purchase of goods, payment of services), and the number of bitcoins is governed by the blockchain technology that underlies its use.

Bitcoin is most popular with people and institutions on the leading edge of technology, and a large number of investors, rather than the everyday consumer. Very few businesses currently accept bitcoin or other cryptocurrencies as payment, but cryptocurrencies are being used by a small number of companies and may be used more often in the coming years.

In this article, Milliman’s Charles Hodge discusses bitcoin and whether it is an appropriate investment vehicle for retirement plan sponsors.