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:
The Milliman Pension Funding Study, launched yesterday, indicates the employers that sponsor the 100-largest corporate pensions contributed a record $59.4 billion to these plans in 2010. Here is the historical record of pension expense and contributions.
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.
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.
People are more likely to save for retirement if they can see themselves…aged. Strange but once again proof that emotional connections help foster behavior changes.
Milliman’s 2011 Pension Funding Study will be released on Tuesday morning. Check back with us then for a review of big issues for corporate pensions in 2010 and a look forward to key considerations for 2011.
It’s been a busy couple of weeks here at the Town Hall. We’ve covered a wide range of topics, starting with stories on some of the negative attitudes about retirement planning (it was not all doom and gloom, though).
First, we continued our coverage of the fears many employees feel about their retirement plans with Confidence crisis?
- Later, we tackled the common belief that pension plans are dying. Bart Pushaw isn’t ready to give the eulogy yet. As Pushaw pointed out in The state of pension plans today, with a few modifications pension plans may be more viable than ever.
- Plus, with retirees worrying about outliving their benefits we investigated using Annuities as a solution to longevity risk.
A new trend for reporting retirement plan numbers may be on the horizon, according to a Pension Risk Matters post by Susan Mangiero, based on a recent report in the Wall Street Journal, “Rewriting Pension History”.
It’s simple enough in concept, calling for earnings reports each year to reflect more accurately the full extent of liabilities and surpluses for that year, rather than “smoothing” sizeable gains and losses from retirement plan assets across longer periods.
Cynics might describe this strategy as a “big bath” approach. Report pain all at once and therefore be able to report higher earnings the following year. On a more benign note, companies may simply want to provide more transparency to their investors, especially at a time when lots of questions are being asked about the costs associated with providing retirement benefits to current and past employees.
Kiplinger’s Retirement Report picks up on a sound retirement planning concept: Using an annuity to create a regular paycheck. Here’s an excerpt:
Finding a way to provide guaranteed income could be crucial if retirees fear outliving their savings. “Many people do not understand life expectancy,” says Noel Abkemeier, a principal at Milliman. Average life expectancy for a 65-year-old male is 84.2 years, and it’s 86.1 years for a 65-year-old female. But, says Abkemeier, “there’s a 50% chance you could live longer than lif expectancy–and it could be 10 to 15 years more.
No wonder there is so much apprehension from future retirees over outliving their benefits. So what’s a retiree to do? Going back to the Kiplinger piece:
Longevity insurance will maximize your retirement income at a time when you may need money to pay for long-term care and other medical expenses. It is best if you think about it as an insurance against living too long, rather than as an investment that may never pay out. Abkemeier recommends investing no more than 10% of your portfolio in longevity insurance, so you’ll have plenty of money for your other needs.
Of course an annuity is not the only way to go. The key thing is for retirees to recognize the risk and prepare accordingly.
We’ve blogged about this before: The benefit outsourcing market has become more mature and now presents an attractive alternative to internal benefits administration, even for smaller firms. Not only has the cost comparison changed, but the increasing complexity, limited flexibility, and inherent risk of internal administration may also combine to make outsourcing a better option. Once the transition to outsourcing is complete, an employer can refocus resources on more important strategic elements that affect its business and its employees.
A new paper published in the latest Benefits Quarterly examines outsourcing possibilities for smaller companies.