Category Archives: Defined benefit

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.

Corporate pension funding up $7 billion in November, $41 billion in past three months

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In November, these pensions experienced a $7 billion improvement, increasing for the third month in a row and bringing the total funded status gain to $41 billion since August 31. This three-month run marks the strongest performing period of 2017.

November’s improvement was the result of robust 0.82% investment gains and pension plan liabilities that remained stagnant as the corporate bond interest rate used to value those liabilities was flat for the month. The funded ratio for the Milliman 100 plans ticked up 0.4% to 85.2% as of November 30.

Barring a calamity in the next month, 2017 has been a stellar year with strong double-digit investment returns for corporate pensions. If discount rates can hold and December investment returns mirror the past 11 months, the funded ratio for these plans will end higher than it was in 2016. Should discount rates end the year with a strong uptick, this will result in more funding optimism as we turn the corner into the new year.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.32% by the end of 2018 and 4.92% 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 115% by the end of 2019. Under a pessimistic forecast (3.02% discount rate at the end of 2018 and 2.42% by the end of 2019 and 3.0% annual returns), the funded ratio would decline to 78% by the end of 2018 and 71% by the end of 2019.

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.

Should DB plan sponsors sign up for paperless records management?

There are several pros and cons for defined benefit (DB) plan sponsors to consider before moving to a paperless records management system. The DB digest article “Paper records: Can we shred them yet?” by Milliman’s Stephanie Sorenson explores the advantages of converting to a paperless system. In the article, Stephanie also discusses the regulatory guidelines and administrative questions plan sponsors need to think about before making such a conversion.

Corporate pensions experience back-to-back monthly gains with $7 billion improvement in October

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In October, these pensions’ funded status experienced a $7 billion uptick, increasing for the second month in a row and bringing the total funded status gain to $32 billion since August 31. October’s improvement was the result of robust 1.19% investment returns, which saw the Milliman PFI plans’ funded ratio climb to 84.7% for the month. Cumulative investment gains in 2017 are 9.57% year-to-date; by comparison, the 2017 Milliman Pension Funding Study reported that the monthly median expected investment return during 2016 was 0.57% (7.0% annualized).

While October’s investment returns are well above expectations, funded status gains were partially offset by the continued low discount rate environment. It will be interesting to see what, if any, changes are in store to interest rate strategy with the nomination of a new Federal Reserve chair.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.76% by the end of 2017 and 4.36% 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 (3.56% discount rate at the end of 2017 and 2.96% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 84% by the end of 2017 and 77% 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.

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.

Updated mortality tables for DB plan lump-sum payments starting in 2018

As expected, the Internal Revenue Service (IRS) has issued updated mortality tables for lump-sum payments paid in plan years beginning in 2018 for defined benefit (DB) pension plans. The use of the new mortality table in 2018 will increase the value of the lump-sum payment to participants by approximately 4% to 5%, depending on the age of the participant on the date of the lump-sum payment. This new lump-sum mortality table is mandatory and cannot be delayed for lump sums paid in 2018.

Although the new mortality table increases lump sums, the 2018 lump-sum interest rates may cause the lump sum value to go up or down. The lump-sum interest rates are also published by the IRS. They are based on three segment rates. The lump sum value is derived by discounting the actual monthly benefit payments at the appropriate segment rate back to the benefit commencement date. Under IRS rules, a plan may have up to a five-month lookback when establishing the lump-sum segment rates used for lump sums paid in a plan year.

The September 2017 rates that will be used for the 2018 lump-sum payments are just slightly higher than the September 2016 rates. We do not yet have the October, November, and December 2017 segment rates, but note that September 2016 reflected the lowest segment rates for lump-sum payments in 2017. So far in 2017, the segment rates have all been lower than the December 2016 segment rates. Lower interest rates translate to higher lump sum values because the monthly benefit payments are discounted at a lower interest rate.

Even with possibly higher lump sum values in 2018, depending on interest rates, it may still be beneficial to look at lump-sum windows in DB pension plans. This is due to increasing Pension Benefit Guaranty Corporation (PBGC) premiums which are indexed each year. In 2017, single-employer PBGC premiums were $69 per participant and $34 per $1,000 of unfunded vested benefits. For 2018, single-employer PBGC premiums will be $74 per participant and $38 per $1,000 of unfunded vested benefits. This is an increase of approximately 7% in the per participant PBGC flat-rate premium and an increase of approximately 12% in the PBGC variable rate premium. Thus, especially for small vested terminated benefits, the cost of a lump-sum window may be less than the present value of the PBGC premiums. Also, annuity purchase rates continue to be low, so again the cost of a lump sum window may be less than buying annuities for vested participants that have left the employer. For both of these reasons, 2018 may be a good time to explore lump-sum windows.