Category Archives: Defined benefit

Multiemployer pension plans nearing healthiest funding since market collapse of 2008

Milliman has released the results of its Fall 2017 Multiemployer Pension Funding Study, which analyzes the funded status of all multiemployer pension plans. As of June 30, 2017, these plans are nearing the healthiest they’ve been since U.S. financial markets collapsed in 2008. In the first six months of 2017, the aggregate funding percentage for all multiemployer pensions climbed from 77% to 81%, reducing the system’s shortfall by $21 billion – an improvement driven largely by favorable investment returns.

In aggregate, asset growth for multiemployer plans far outpaced assumptions for the first half of 2017. But that bears little weight for critical plans, which are hurt by their substantially lower asset base. Despite the bull market, we’re seeing the funding gap continue to widen between critical and noncritical plans.

While noncritical plans are nearing an aggregate funded percentage of 90%, the funding level for critical plans remains around 60%. Currently about a quarter of the plans tracked by Milliman’s Multiemployer study fall within critical levels, with some of the most troubled on track to rely on assistance from the PBGC – which itself is facing severe financial challenges. Comparatively, of the approximately 1,250 plans analyzed in the study, around 75% are considered noncritical.

To view the complete study, click here.

Also, to receive regular updates of Milliman’s pension funding analysis, contact us here.

Corporate pensions experience largest gains of the year in September

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In September, these pension plans experienced their largest improvement year-to-date, with a $26 billion increase in funded status. The improvement was the result of a nine-basis-point increase in discount rates coupled with market value gains, which saw the Milliman PFI plans’ funded ratio climb from 83.0% to 84.3% for the month.

While September’s positive performance is welcome news for these pensions, it’s tempered somewhat by the recent release of the new mortality tables by the IRS. Much of the fourth quarter will be spent in anticipation of how the new regulation will affect 2018 cash contribution funding, PBGC premiums, and de-risking efforts.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.84% by the end of 2017 and 4.44% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 87% by the end of 2017 and 101% by the end of 2018. Under a pessimistic forecast (3.54% discount rate at the end of 2017 and 2.94% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 83% by the end of 2017 and 76% by the end of 2018.

To view the complete Pension Funding Index, click here. Also, to see the 2017 Milliman 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 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 (life-long) and how much premium participants are willing to pay for their retirement is 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.

Formula updates and new options improve retirement benefits

One defined benefit (DB) plan sponsor decided to change how the plan calculated participant benefits from a final average pay formula to a cash balance formula. The change produced two groups of employees with significantly different levels of retirement benefits. Milliman was able to help the sponsor improve the amount of benefits provided to employees as well as give them the ability to receive income in retirement on a flexible basis for employees individual needs. Milliman actuary Vicki Mazzie provides some perspective in this article.

Corporate pensions face largest monthly loss of 2017 in August

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In August, the funded status of these plans fell by $17 billion—the largest loss year-to-date—due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. The Milliman 100 PFI plans saw their deficit swell from $281 billion as of July 31 to $298 billion at the end of August. The funded ratio dropped from 83.8% to 83.0% over the same time period, and is now below where it was at the beginning of 2017 for the first time this year.

The funded ratio for the Milliman 100 plans continues to teeter up and down during 2017, and now we find it below the mark set at the beginning of the year. It will be interesting to see how discount rates will change over the next few months and how the potential release of updated mortality tables will affect pension contributions and funded status going forward.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.80% by the end of 2017 and 4.40% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 87% by the end of 2017 and 100% by the end of 2018. Under a pessimistic forecast (3.40% discount rate at the end of 2017 and 2.80% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 81% by the end of 2017 and 74% by the end of 2018.

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

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.