Category Archives: Defined benefit

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).

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.

Pension spring cleaning can start with required minimum distributions

One of the most daunting challenges a pension plan can face is distributing required minimum distributions (RMDs) at a terminated vested participant’s required beginning date (RBD). The RBD is akin to cleaning house for the Internal Revenue Service (IRS) because tax-deferred income must start being taxed by the statutory date. Ostensibly, this income will be taxed in full within the participant’s lifetime.

The fall is the perfect time to take stock of which participants (including alternate payees, spouses, and non-spouse beneficiaries) are required to commence payment by April 1 of the following year. Any corrective actions that need to be taken for those participants who missed their RBDs may be completed before filing Form 5500.

To read more about cleaning up with required minimum distributions, read Jennifer Godwin’s article here.

Corporate pensions’ investment losses in February buoyed by higher discount rates

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Despite the market volatility in February, these pensions experienced a $13 billion improvement in funded status thanks to an increase in the corporate bond rates used to measure pension liabilities. While the market value of assets for these pensions lost $32 billion in February, plan liabilities also shrunk, narrowing the deficit from $219 billion at the end of January to $206 billion as of February 28. The funded ratio for the Milliman 100 PFI rose from 87.3% to 87.7% during the same time period.

Despite the recent market volatility, February’s 21 basis point discount rate increase buoyed pension funding this month. In fact, thanks to strong investment performance in January along with an increase in discount rates in both January and February, overall pension funding for these plans has risen $75 billion over the past two months—not a bad way to start 2018.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.45% by the end of 2018 and 5.05% by the end of 2019) and asset gains (11.0% annual returns), the funded ratio would climb to 99% by the end of 2018 and 114% by the end of 2019. Under a pessimistic forecast (3.45% discount rate at the end of 2018 and 2.85% by the end of 2019 and 3.0% annual returns), the funded ratio would decline to 82% by the end of 2018 and 75% by the end of 2019.

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