Monthly Archives: March 2011

Turning a decline into an improvement

We blogged yesterday about the record pension contributions by the Milliman 100 companies, which are measured in Milliman’s annual Pension Funding Study. Coverage of the study in aiCIO helps put these contributions in perspective.

“We were surprised by the level of employer contributions, which turned a decline in funded status into an improvement in funded status,” John W. Ehrhardt, the firm’s principal, consulting actuary, and co-author of the Milliman 100 Pension Funding Index, told aiCIO. “Companies are being conservative in their projections, spurred by the combined effects of asset losses in 2008 and low interest rates that have driven pension funding requirements up, likely to continue in 2011,” he said.

See additional coverage of the study in:

LDI and mark-to-market

Bart Pushaw

Susan Mangiero recently responded to our post of last week on a new reporting trend in retirement plans, one that calls for a more accurate reflection of liabilities and surpluses in a single year rather than “smoothing” gains and losses over longer periods. The back-and-forth has us thinking it may be useful to provide more clarification on liability-driven investing (LDI) and mark-to-market accounting.

First off, let’s be clear: When we refer to mark-to-market liabilities, it’s not necessarily accounting requirements that are of central concern. Financial Accounting Standards have been instrumental on the financial reporting side of things, but it’s really the Pension Protection Act that is central here, both because it introduced mark-to-market on pension funding and also because it makes LDI viable. The market crashes in 2008 and, previously, in 2001-02 verify the primacy of LDI. Without mark-to-market–which entails valuing liabilities based on current market interest rates/yields–LDI cannot exist. In this sense, mark-to-market enables LDI to work. Whle not a perfect congruence, reducing funding volatilities will also reduce accounting volatilities. Since funded and accounting rules require mark-to-market, LDI can be implemented with either as the primary cost metric.

Backing up even further, a primer may be helpful. For retirement plan sponsors, mark-to-market accounting tends to introduce risks, chiefly related to interest rates. It’s a factor many of them have never had to deal with before. In the simplest terms, the goal of LDI is to address those risks. The strategy is simple enough, calling for as close a match as possible between asset and liability returns over the course of a year. If asset returns match liability returns, then the funded level at the end of the year will be the same as at the beginning of the year, all things being equal. By operating on such an even keel, funded status volatility and thus contribution requirements are kept as manageable and predictable as possible.

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2011 Pension Funding Study

The 11th annual Milliman Pension Funding Study is now available. In 2011, the 100 corporate pensions measured by this study saw a slight improvement in funded status. While assets performed well in 2010–a 12.8% return and a $115 billion improvement–they were counteracted by a liability increase of 7.7% (resulting in a $103 increase in the projected benefit obligation). These competing dynamics are illustrated in the plan asset and liability graph.

The full study is available here. Business Insurance’s coverage is available here.