Monthly Archives: August 2010

Will 2010 be a record year for DB plan contributions?

BNA’s Daily Report for Executives looks to answer this question. Here is an excerpt:

Contributions to defined benefit pension funds could reach an all-time high in 2010 and go even higher in 2011, John Ehrhardt, a principal and consulting actuary in the New York office of Milliman, told BNA Aug. 16.

“We may be looking at over $100 billion of cash going into these plans next year,” Ehrhardt said.

Because many companies used pension funding rules under the Pension Protection Act of 2006 (Pub. L. No. 109-280) to smooth the asset losses they experienced in 2008, those losses will begin to be reflected in 2010 and fully reflected in 2011 with “a big hump” in contributions, Ehrhardt said.

Is liability-driven investing taking hold?

A new article in CFO Magazine looks at the progress—or lack thereof—in the adoption of liability-driven investing by pensions. Here is an excerpt:

In the past year or so, however, experts say they have seen companies becoming more reluctant to press forward with LDI strategies, for a variety of reasons.

For one, the equity markets’ relatively strong performance has created a siren call for plan sponsors that previously saw big losses. “Companies that are underfunded are more likely to stay with equities in hopes of investing their way out” of the situation, assuming they’re not in such poor condition that they can’t afford to take the risk, says John Ehrhardt, a principal with Milliman and author of its annual pension funding survey.

Milliman’s study this year (based on last year’s 10-Ks) hints at this. In 2009 pension equity allocations increased slightly, from an average of 44% to 46%, after several years of sharp declines. Some companies even made big increases in the category. Baxter International, whose pension plan was about 71% funded at the end of last year, boosted its equity allocation up to 69%, from 50% the year before, according to Milliman data.

Pension funded status improves in July

After a three-month decline, corporate pensions saw some positive developments in pension funded status during July:

The July improvement in pension funded status is welcome news after a three-month period that witnessed a $171 billion decline,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index. “Unfortunately we still have a long ways to go just to get back to 80% funded status. In order to reverse the deficit, it will require more than just positive asset performance. If you look at the last year, we’ve actually experienced a 10.2% cumulative asset return — but have still seen a $61 billion decrease in funded status thanks to lower trending discount rates.”

See the latest Pension Funding Index.

New annuity standards

SPARK has announced a preliminary draft of new annuity standards. Here is a description from the article in Fund Action (login required):

The standardization document provides three models for firms offering annuity products:

– The Record Keeper Traded Service Model, based on the mutual fund model for recordkeeping and trading, would be used by firms structured like Prudential Retirement, which utilize the market value of the underlying investments in the insurance products to determine the guaranteed income amount.

– The Provider Traded Service Model, based on a self-directed brokerage concept, in which the annuity provider, rather than the recordkeeper, values the product. Firms such as Great-West Retirement Services and MetLife use this model.

– The Guarantee Administrator Model, which is similar to the Record Keeper Traded Model, would be used with firms like Milliman, which involve a lead insurer and a group of reinsurers, and design products collaboratively with recordkeepers and insurers.