Category Archives: Defined benefit

Investment gains, higher discount rates lead to $28 billion corporate funded status improvement in March

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In March, the deficit for these pension plans decreased from $275 billion to $247 billion, a $28 billion improvement that resulted from robust asset returns and an increase in benchmark corporate bond rates used to value pension liabilities. The funded ratio for these pensions climbed from 83.8% to 85.3% as of March 31.

The first quarter of 2017 has seen the cumulative asset values of the Milliman 100 pension plans exceed expectations – increasing by $37 billion thanks to strong recurring investment returns – while discount rates are just shy of where they were at the beginning of the year. Overall, funded status has increased by $33 billion during the quarter.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.41% by the end of 2017 and 5.01% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 95% by the end of 2017 and 108% by the end of 2018. Under a pessimistic forecast (3.51% discount rate at the end of 2017 and 2.91% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 80% by the end of 2017 and 73% by the end of 2018.

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.

Despite robust investment returns, 100 largest U.S. corporate pension plans saw their funded status decrease by $21.7 billion in 2016

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 to 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 post-election 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 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 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.

2016 survey of Indonesian employee benefit obligations

In this report, actuaries Halim Gunawan and Herry Kuswara analyze the employee benefit obligations of Indonesian companies. The authors focus on post-employment, termination, and other long-term employee benefits. The report aims to educate and create awareness about the state of employer-sponsored long-term employee benefit programs in Indonesia.

Five months of corporate pension funded status improvement ends with February’s $6 billion decline

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In February, after five months of steady improvement, these pension plans experienced a $6 billion decline in funded status primarily due to discount rates that plunged from 4.00% in January to 3.89% in February, an 11 basis point drop. The funded ratio for these pensions inched down from 81.6% to 81.5% over the same time period. Robust investment gains of 1.74% helped offset the funded status decline.

While February’s strong investment gains helped soften the blow dealt by the discount rate decline, all eyes are on interest rates right now. The Federal Reserve has signaled it will raise rates this month, which would be welcome news for pension plans.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.39% by the end of 2017 and 4.99% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 91% by the end of 2017 and 104% by the end of 2018. Under a pessimistic forecast (3.39% discount rate at the end of 2017 and 2.79% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 75% by the end of 2017 and 69% by the end of 2018.

Potential solutions for reducing PBGC premiums

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.