Category Archives: Pensions

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.

One-third of 100 largest public pensions reduced interest rate assumptions in latest reported fiscal year

Milliman today released the results of its 2017 Public Pension Funding Study (PPFS), which analyzes funding levels of the nation’s 100 largest public pension plans, including an independent assessment on the expected real return of each plan’s investments.

As of June 30, 2017, the estimated aggregate funded ratio of the nation’s largest public pension plans is 70.7%, up from 67.7% at the end of the plans’ latest reported fiscal years (generally June 30, 2016). Total assets for these plans at their fiscal year-ends were reported at $3.19 trillion, and as of June 30, 2017, are estimated to have jumped to a combined $3.44 trillion thanks to strong market performance in late 2016 and early 2017. As for Total Pension Liability (TPL), the Milliman 100 public plans reported at their latest fiscal year-ends an aggregate TPL of $4.72 trillion, covering more than 26 million members; this figure is estimated to have risen to $4.87 trillion as of June 30, 2017.

An in-depth analysis by Milliman, however, estimates these plans’ total liabilities could be even higher. Based on the market’s consensus views that long-term investment returns have been declining, the study recalibrated TPL for each plan using independently determined interest rate assumptions. For this study, we use the term “interest rate” to indicate the assumption the plan sponsor has chosen to determine contribution amounts, and the term “discount rate” to indicate the rate used to measure liabilities for financial reporting purposes. In aggregate, Milliman estimates the recalibrated TPL for the Milliman 100 plans is $4.98 trillion as of their fiscal year-ends–$260 billion higher than reported by sponsors.

In this low-interest-rate environment, market expectations on investment returns have been falling faster than plan sponsors can reassess rates. And the gap that creates between sponsor-reported and our recalibrated market-based liabilities is widening, which is all the more reason plans should continue to monitor emerging investment return expectations and adjust their assumptions as needed.

While plan sponsors report a median discount rate of 7.50% (with a spread of 6.50% to 8.50%), Milliman’s assessment of the expected real return for each plan’s investments puts the median rate at 6.71%-lower than all but six of the 100 sponsor-reported rates. Despite one-third of the plans lowering their discount rates since the last study, this gap between sponsor-reported and independently determined rates continues to widen, indicating that further reductions in discount rates will be likely in the coming years.

To view the Milliman 100 Public Pension Funding Study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

Knowing participants’ profiles is becoming increasingly important

The debate about a new pension system in the Netherlands is becoming more and more complicated because of issues including solidarity, labor market flexibility, indexation security and uncertainty about the level of pension income. These subjects are complicated. The question regarding whether pension income from retirement date is high enough in relation to income received in active employment or more relevant to the spending pattern is not often mentioned in this context. The questions about how long pension is to be paid out (lifelong) and how much premium participants are willing to pay for their retirement are rarely discussed.

We suspect that one of the reasons that we find these questions so difficult to answer is because we do not really know about the (ex) participants (workers, retirees and former participants with vested pensions). As a consequence, the pension debate becomes an abstract compensation and benefits discussion focused on a complicated financing component.

Having relevant knowledge about our stakeholders could provide significant benefits. If we know and understand our participants well, then:

• Pensions, even without specific customization, could be fitted to stakeholders more appropriately.
• Choosing the most appropriate financing (in terms of risk, duration and reservation) could be ensured.

Getting knowledge and information about our pension stakeholders can be accomplished in various ways. This may include:

• The pension stakeholders ask the right questions at the right level of knowledge-estimated by using available data (such as salary level and job title)-and in understandable language
• Combining knowledge of our pension stakeholders with external data to gain more insight and to better understand their needs.

A good example is the correlation between education level and life expectancy of participants. The Dutch Central Bureau of Statistics (CBS) regularly publishes that the life expectancy of a Dutch man with a highly qualified education at the academic level is much higher than that of a man who has enjoyed a maximum of elementary school education. Milliman calculated that the remaining life expectancy at the age of 68 for the more highly educated group was more than two years greater than for the other group.

In practice, it appears that data about the training of individual participants is often not available to pension funds. If this information were adequately collected and stored in the near future, then additional analyses could be performed using this data. This contributes to the necessary knowledge and insight into the needs of our pension stakeholders. As a result, not only the expected duration of benefits can be determined, but also, by combining this data with other available data, we could estimate the individual’s income needs. The combination of data and analysis of connections between data can create even greater insight. For example, it makes a big difference whether a participant in a retirement scheme has a physically demanding occupation or a light one, whether he travels regularly or stays at home reading, and whether he maintains a healthy lifestyle or just the opposite.

Collecting knowledge about our participants and analyzing already available knowledge or information (big data) could ensure that we design better pension schemes and that their funding takes place in the most appropriate way.

Let’s start with that today. More knowledge and insight into participant profiles helps both the employer and the performer get better “demonstrable in control” information regarding their pension commitments, provisions, and HRM policies.

Integrated risk management roundtable for Dutch pension funds

Milliman has organized a roundtable discussion to explore integrated risk management (IRM) for Dutch pension funds, for Wednesday, 27 September 2017, in Amsterdam. While the Dutch National Bank (DNB) devotes a lot of attention to IRM and expects pension funds to have a structured approach, we find that many funds have difficulty formalising one.

At this roundtable, Milliman consultants will discuss the following:

• What is IRM and what does it entail?
• What are common IRM strategies and policies for Dutch pension funds?
• How can the pension board perform a thorough risk assessment?
• How can the board ensure proper commitment to IRM?
• How can the board ensure adequate monitoring and evaluation?
• How can the board ensure that the DNB is satisfied with a fund’s IRM?

Seats are limited. If you would like to attend, email us here for more information.

Roundtable on UK defined benefit pension schemes

MBW International, a UK-based joint venture between Milliman and Barnett Waddingham, has organised a roundtable discussion entitled “UK defined benefit pensions, a current overview: What can we learn in the Netherlands?” on Tuesday, 3 October 2017.

The roundtable is aimed at Dutch companies with a deficit in their UK defined benefit (DB) pension schemes as well as companies interested in learning more about the latest UK pension developments.

The roundtable will focus on the following topics:

  • An update on the UK pensions market and the impact it is having on Dutch companies—this will include recent analysis by the leading UK actuarial firm Barnett Waddingham LLP (the analysis will be distributed at the event).
  • Current market opportunities which could help companies tackle their UK pension problems, including:
  1. Changes to the way UK employees can access their pension savings that make it more attractive for them to transfer DB benefits into defined contribution (DC) arrangements. This helps reduce the scale of the historic DB obligations.
  2. Continuing developments in the UK bulk annuity market.
  • What can we learn in the Netherlands from our UK counterparts?
  • Management of international pension plans—how can this be done in a more harmonised manner to increase efficiency, reduce risk, and achieve greater consistency across a business.

MBW International Directors Nick Griggs and Andrew Vaughan are guest speakers. Both Nick and Andrew have considerable experience dealing with these UK pension issues.

Seats are limited. If you would like to attend, email us here for more information.

Public pension funding ticks upward in Q2 amid strong investment returns

Milliman today released the second quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q2 2017, the funded ratio of these plans ticked upward, climbing from 72.0% at the end of March to 73.0% as of June 30, 2017. These plans saw their funded status improve by $33 billion for the quarter, the result of strong investment returns (measuring 3.06% in aggregate) that led public plan asset growth to outpace the rise in pension liabilities.

The Milliman 100 PPFI total pension liability (TPL) increased from $4.698 trillion at the end of Q1 to an estimated $4.737 trillion at the end of Q2. 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. The second quarter also saw four more Milliman 100 plans cross the 90% funded mark; as of the end of Q2, 19 plans have funded ratios above 90%, 60 have funded ratios between 60% and 90%, and 21 have funded ratios lower than 60%.

During the first half of 2017, the number of PPFI plans funded at 90% or above has almost doubled. But while strong market returns have helped plans across the board this spring, the lowest funded plans simply do not have enough dollars in the market for these favorable conditions to boost their funded ratios appreciably. In the absence of more contributions from plan sponsors, these poorly funded plans might find themselves in a position where benefit reforms are necessary in order to maintain their ability to pay benefits.

To view the Milliman 100 Public Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.