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.
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.
“The design is truly sustainable in a way that defined benefit and defined contribution plans are not,” explains Kelly Coffing, Milliman principal and consulting actuary, based in Seattle. The SIP, she continues, offers “lifelong income and funding stability while maintaining a balanced portfolio to get the best risk adjusted returns.”
How? The SIP is technically a defined benefit plan, but one in which benefits adjust up or down with the plan’s performance, “thereby keeping assets and liabilities in balance,” says Coffing. The plan establishes a base investment return or “hurdle rate.” If annual returns equal that rate, the plan functions like any other defined benefit plan. But if they lag or surpass that rate, the benefits increase or decrease accordingly.
“Like a traditional defined benefit plan, participants receive a lifelong monthly benefit,” says Coffing. “Unlike a traditional plan, the level of the monthly benefit is not fixed, but can adjust, up or down, based on actual investment returns of the plan.”
Contributions, on the other hand, don’t have to adjust. The SIP is designed for a specific contribution level that doesn’t change from year to year and, as such, is kept fully funded in all economic environments. “The contributions are directly tied to the benefit levels desired in the plan and are mostly related to the level of contributions employers want to make for retirement and/or the desired level of benefits to be provided,” says Coffing.
To learn more about the SIP, watch the following video.
The Stabilized Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income Plan™ (SIP).
Milliman and Barnett Waddingham, UK’s largest independent provider of actuarial, administration and consultancy services, today announced a joint venture.
Operating under the name of MBW International, the joint venture brings together the significant expertise of the two independent firms to deliver superior global retirement benefits advice to companies with headquarters in the UK and global companies with UK operations. The new organisation will offer truly independent global pensions advice from a single source, with full access to the experience and resources that live within the Barnett Waddingham and Milliman businesses. It will follow their shared values of providing quality, independent advice to their clients.
Nick Salter, Senior Partner at Barnett Waddingham, said: “MBW International will allow us to extend our global pensions expertise to support the full needs of multinational organisations with their overseas pension arrangements, whilst retaining the independent ownership structure of Barnett Waddingham. Clients of MBW International can expect to receive the same high quality, independent advice that Barnett Waddingham and Milliman are already known for.”
Steve White, Milliman CEO, said: “The establishment of MBW International enhances the range of retirement consulting services Milliman can offer its multinational and UK-headquartered clients. The obvious synergies between Milliman and Barnett Waddingham are built on our shared values: Independence, quality, and dedication to superior client service.”
Milliman has released the results of its 2017 Pension Funding Study, which analyzes the largest corporate pension plans sponsored by 100 U.S. public companies. In 2016, these pension plans experienced a $21.7 billion decrease in funded status, the result of a $54.0 billion increase in the projected benefit obligation (PBO) that was only partially offset by a $32.3 billion increase in the market value of plan assets. As a result, these Milliman 100 plans finished off the year with a funded ratio of 81.2%, down from 81.9% the year before. But the $21.7 billion deterioration and incremental drop in funded status mask a year that experienced volatility across the board for pension plans.
The last year was quite the tug-of-war for these pension plans. Investment performance exceeded expectations, with the 100 largest U.S. pensions experiencing returns of 8.4%—compare that with 0.8% the year prior. But the volatile interest rate environment saw the discount rate plummet by 30 basis points. In 2016, these dynamics resulted in a funded ratio that oscillated back and forth for most of the year before the postelection bump. The end result was a funded ratio of 81.2%—not that far off from where we’ve been at the end of 2015 and 2014.
Study highlights include:
Analysis of asset gains. The 8.4% investment returns experienced by these pension plans was well above the 7.0% return expectation set for 2016. Meanwhile employers’ 2016 plan contributions were up 38% from the year prior. One possible reason for the higher plan contributions is that they improve funded status, resulting in lower Pension Benefit Guaranty Corporation (PBGC) premium expenses.
Impact of updated mortality assumptions. Further decreases in future life expectancy for the second year in a row result in significant reductions in projected benefit obligation (PBO) for several Milliman 100 companies.
Use of spot rates increases by 24%. Forty-six of the largest 100 plan sponsor companies will consider recording the fiscal year 2017 pension expense using an accounting method change linked to the spot interest rates derived from yield curves of high-quality corporate bonds. The move to spot rates will result in pension expense savings.
Pension risk transfers continue. The estimated sum of pension risk transfers to insurance companies (“pension lift-outs”) and settlement payments increased from $11.6 billion in FY2015 to $13.6 billion in FY2016.
To view the Milliman Corporate Pension Funding Study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.
Defined benefit (DB) plan sponsors continue to seek options to reduce their Pension Benefit Guaranty Corporation (PBGC) premiums, especially the variable rate premium. Milliman actuary Bret Linton highlights the following three solutions for plan sponsors to consider in his article “The challenge: Reducing PBGC variable rate premiums.”
1. Additional contributions, credited to the prior plan year.
2. Borrowing capital at a lower interest rate than the PBGC variable rate.
3. Splitting the pension plan into two plans: one with only actives and a second with the remaining retirees and terminated vested participants.