Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In December, the funded status for these pension plans improved by $13 billion due to robust investment returns of 1.17%, and the funded ratio increased from 80.3% to 81.0% to close out the year. Overall, interest rate declines characterized 2016, with the end of August marking the lowest discount rate (at 3.32%) in the PFI’s 16-year history. Since that point and coincident with the conclusion of the U.S. presidential election, interest rates have steadily increased.
Last year was a rollercoaster of a year, but we’re ending up nearly where we started – with a funded ratio of 81.0%. Going into 2017, rumors of potential multiple interest rate hikes by the Federal Reserve have plan sponsors and pension practitioners closely watching market activity. If interest rates continue to climb, the funded ratio could make some major gains.
Looking forward, under an optimistic forecast with rising interest rates (reaching 4.59% by the end of 2017 and 5.19% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 93% by the end of 2017 and 106% by the end of 2018. Under a pessimistic forecast (3.39% discount rate at the end of 2017 and 2.79% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 74% by the end of 2017 and 68% by the end of 2018.
The 100 largest U.S. corporate pension plans experienced a minuscule funding improvement of 0.1% in 2015, according to the Milliman 2016 Pension Funding Study (PFS). The aggregate funded ratio increased from 81.7% to 81.8% based on a $75.8 billion decrease in the market value of plan assets and a $94.5 billion decrease in the projected benefit obligation (PBO). This resulted in an $18.7 billion improvement in funded status.
In this Milliman Hangout, PFS coauthor Zorast Wadia discusses the results of the study with Amy Resnick, editor of Pensions & Investments.
Milliman consultants had another prolific publishing year in 2014, with blog topics ranging from healthcare reform to HATFA. As 2014 comes to a close, we’ve highlighted Milliman’s top 20 blogs for 2014 based on total page views.
17. In her blog, “PBGC variable rate premium: Should plans make the switch?,” Milliman’s Maria Moliterno provides examples of how consultants can estimate variable rate premiums using either the standard premium funding target or the alternative premium funding target for 2014 and 2015 plan years.
Over the past few years, there is evidence to confirm that several employers sponsoring defined benefit (DB) pension plans have been settling their plans’ pension obligation to former employees via a single lump-sum payout. It is commonly referred to as a lump-sum cleanup strategy. Some commenters have said that not only has demand for such a strategy not abated, it has accelerated.
This blog post will remain neutral on the prudence of implementing such a strategy, as each employer’s goal is unique. Recognizing that employers who implement such strategies spend enormous energy and resources to communicate the consequences and financial impact on those electing the lump-sum payout, it’s questionable whether recipients completely understand the individual tax implications it could personally have on them. (And to be clear, this blog post does not implicitly or explicitly render any type of tax advice.)
If a participant chooses to roll over the lump-sum distribution to a personal tax-deferred IRA or to a tax-qualified savings plan of a new employer, the issues below are irrelevant. However, if the lump-sum is received as current income:
• The individual could move into the next higher marginal tax bracket, both federal and state (where there is a state income tax).
• The individual could face a 10% excise tax if that person is younger than age 59½.
• The individual could incur an underwithholding penalty in comparison to their prior year’s tax liability.
• According to the U.S. Department of Health and Human Services (HHS), eligible individuals and families with incomes between 100% and 400% of the federal poverty level (FPL) may receive premium tax credits for purchasing health insurance in the healthcare exchange. The 2013 FPL for a single person is $11,490 and this individual’s healthcare premium payment is capped at $228 per year. A lump-sum of approximately $29,000 would raise that premium cap to $3,816. A lump-sum of approximately $34,000 would raise income above 400% of the FPL and the individual would have to pay the full premium of the healthcare policy selected on the healthcare exchange.
Takeaway: The economic impact of a lump-sum payout must be carefully evaluated by the recipient. It may not be as advantageous as it appears. Plan sponsors implementing this strategy may wish to consider the impacts of the ACA as they draft the communications to the prospective payees.
Perhaps unknown to most NFL fans was the actual technical issue between the owners and the regular referees that was the cause of the strike and, ultimately, the faux victory by Seattle over Green Bay.
It wasn’t pay and it wasn’t travel. It was that the refs wanted to continue with their defined benefit (DB) pension plan and not move to a defined contribution (DC) savings plan.
The two sides had been particularly at odds over pensions, which seemed to emerge as the major sticking point late in the negotiations. Referees wanted to retain their pension plan, which the league apparently considered too generous, particularly for part-time employees. The NFL wanted to switch the officials to 401(k) retirement plans. The compromise that was struck, according to an announcement by the league about the terms of the deal, would keep the pension plan in place for current officials for five years through the 2016 season, at which point it will be frozen. Newly hired officials will be given 401(k) retirement plans, as will all officials beginning in 2017.
The surrender of the DB plan in the so-called “eight-year compromise” appears to be mostly the result of a provision that the basic salary will rise from $149,000 last season to $173,000 in 2013 and $205,000 in 2019.
Confidence of eight years without another referee work stoppage is a touchdown for the fans—though it’s a few days too late for Packer fans.
If you have ever compared the estimate of your Social Security benefit generated by any financial forecast engine and the estimate that you can get at any time from the official website of the Social Security Administration (SSA), you’ve probably noticed that they are different. And in the cases of many individuals who are “young,” they are likely to be radically different. So is one calculation better than the other?
The unfortunate answer is that both answers are probably fine, but you need to have some understanding of how the calculations are created. Let’s take a brief look under the hood of both.
The SSA recently announced that it has ended the annual mailing of the statement to your home of your actual salary history, based on which you paid your FICA payroll taxes. Now you must log in to its secure website at www.ssa.gov and follow the specific instructions to retrieve it. Once you generate your official Social Security statement, you can find the calculations the SSA uses and compare them to your own assumptions.
Let’s assume that you have properly filed your 2011 personal income taxes. The SSA will use the compensation you reported in 2011 as the amount to be earned in each of the future years until you are able to commence Social Security benefits at your “Social Security Retirement Age,” which can be as high as age 67. In 2011, if you were age 47 and earned $45,000, the SSA calculation engine assumes you will earn $45,000 in 2012, 2013, 2014, and so on for as many years as it needs for the calculation.
For any common calculation engine you may be using, you are probably able to include an assumption for your wage growth. Call it 3% per year as an example—$45,000 thus becomes almost $60,500 after 10 years of 3% increases. So your calculation engine is likely going to produce a Social Security benefit estimate that is much higher when compared to the SSA calculation.
There are many other differences in the calculation to consider, including if your 2011 wages for payroll tax were much lower than before 2011. But careful inspection of the forecast assumption in your calculation engine will enable you to begin to understand why the estimates of your Social Security benefits can be so different.