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Google+ Hangout: Pension Funding Index, July 2014

July 15th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans increased by $14 billion during June as measured by the Milliman 100 Pension Funding Index (PFI). The deficit improved from $266 billion to $252 billion at the end of June, primarily due to investment gains. As of June 30, the funded ratio rose from 84.5% to 85.3%. However, the funded ratio is still down for the year from 88.3% as of December 31, 2013. June was the first month in 2014 when discount rates increased, but only by 0.02%. Fortunately, the strong year-to-date asset performance has mitigated deeper funded status erosion.

Index co-author Zorast Wadia discusses the results on Milliman’s monthly PFI Google+ Hangout with Jeremy Engdahl-Johnson.

Corporate pension funded status improves by $14 billion in June

July 10th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In June, these plans experienced a $3 billion decrease in pension liabilities and an $11 billion increase in asset value, resulting in a $14 billion decrease in the pension funded status deficit.

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If you want to understand why pension funded status is down this year, consider the fact that June was the first month in 2014 with rising interest rates—and it’s not like we saw a massive swing. Interest rates continue to be the story with these pensions.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.08% were maintained, funded status would improve, with the funded status deficit shrinking to $228 billion (86.7% funded ratio) by the end of 2014 and to $173 billion (89.9% funded ratio) by the end of 2015.

Google+ Hangout: Pension Funding Index, June 2014

June 18th, 2014 No comments

The funded status deficit of the 100 largest corporate defined benefit pension plans increased by $10 billion during May as measured by the Milliman 100 Pension Funding Index (PFI). The $268 billion deficit at the end of May is primarily due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. Investment gains helped to partially offset the full extent of liability increases in May. During May, the funded ratio fell from 84.7% down to 84.3%.

PFI co-author Zorast Wadia discusses the index’s latest results on this Milliman Google+ Hangout.

Pension funded status deficit increases by $10 billion in May, reaches $268 billion

June 6th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In May, these plans experienced a $29 billion increase in pension liabilities and a $19 billion increase in asset value, resulting in a $10 billion increase in the pension funded status deficit.

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In every month of 2014 so far we have seen a decline in interest rates. These pensions have experienced a $43 billion increase in assets, but the market gains have been dwarfed by a $125 billion increase in liabilities.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.06% were maintained, funded status would improve, with the funded status deficit shrinking to $241 billion (86.0% funded ratio) by the end of 2014 and to $187 billion (89.2% funded ratio) by the end of 2015.

Google+ Hangout: Pension Funding Index, May 2014

May 12th, 2014 No comments

The funded status deficit of the 100 largest corporate defined benefit pension plans increased by $15 billion during April as measured by the Milliman 100 Pension Funding Index (PFI). The $258 billion deficit at the end of April is primarily due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. Asset improvements helped to partially offset the full extent of liability increases in April. From the end of March through April 30, the funded ratio fell from 85.3% to 84.7%.

PFI co-author Zorast Wadia offers some perspective on the latest results in this Milliman Google+ Hangout.

Pension funded status deficit increases by $15 billion in April

May 7th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In April, these plans experienced a $21 billion increase in pension liabilities and a $6 billion increase in asset value, resulting in a $15 billion increase in the pension funded status deficit.

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We keep slipping further and further away from full funding. The historic improvement of 2013 has been countered by a $72 billion decrease in funded status so far in 2014, with falling interest rates driving much of the change.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.20% were maintained, funded status would improve, with the funded status deficit shrinking to $228 billion (86.5% funded ratio) by the end of 2014 and to $175 billion (89.7% funded ratio) by the end of 2015.

Possible MAP-21 extension presents additional funding stabilization

April 16th, 2014 No comments

A provision appended to the Emergency Unemployment Compensation Extension Act of 2014 may offer defined benefit (DB) plan sponsors continued funding relief. The provision would extend the funding stabilization authorized under the Moving Ahead for Progress in the 21st Century Act (MAP-21) another five years.

In a recent Bloomberg BNA article, Zorast Wadia talks about the benefits of lengthening the MAP-21 provision. Here is an excerpt:

The MAP-21 provisions stabilize the discount rates used to calculate employers’ pension funding obligations by adjusting rates if they fall outside of an interest rate “corridor” tied to average rates over a 25-year period. Those corridors gradually widen through 2016, weakening their impact. The provisions were designed to raise revenue by lowering companies’ required pension contributions and thereby driving up taxable income and projected tax receipts.

As the MAP-21 smoothing provisions enter the midway point in 2014, plan sponsors are beginning to see the relief wear off, said Zorast Wadia, a principal and consulting actuary in the New York office of Milliman.

Interest rates continually declined from 2009 to 2012, and only began to rebound in 2013, so pension liabilities still remain at all-time highs, Wadia said. Lessening the relief could put many sponsors in a “tough situation again,” he said.

Under MAP-21, the corridor incrementally widens from 10 percent in 2012 to 30 percent in 2016. Under the unemployment insurance legislation, the corridor would remain at 10 percent through 2017 and incrementally widen to 30 percent after 2020.

There is a lot of incentive to fully fund plans more quickly, one reason being rising premiums set by the Pension Benefit Guaranty Corporation, Wadia said. “But those [plans] that are cash-strapped will probably welcome this opportunity, and continue to eke by, to do what they need to get on through,” he said.

Results from the 2014 Pension Funding Study (PFS) suggest that plan sponsors took advantage of MAP-21’s funding relief. Contributions declined significantly during 2013, according to the PFS.

The $44.1 billion in contributions during 2013 (down $18.1 billion from $62.2 billion in 2012) was the lowest level in five years. The lower-than-expected contributions were likely due to plan sponsors changing their contribution strategy in light of the MAP-21 interest rate stabilization legislation, passed in July of 2012. Seven companies decreased their contribution by more than $1 billion in 2013 compared with 2012, for a total of $13.3 billion….

Pension funded status drops by $5 billion in March

April 15th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest defined benefit pension plans. In March, these plans experienced a $5 billion increase in pension liabilities in a month with flat investment return, resulting in a $5 billion increase in the pension funded status deficit.

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It was a brutal first quarter, with the deficit for these 100 pensions climbing by $79 billion, which was due to a combination of asset underperformance and interest rate decreases. Funded status greatly improved during 2013 but things have changed course in the first quarter of 2014 as the funding ratio has dropped to 84%.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.30% were maintained, funded status would improve, with the funded status deficit shrinking to $232 billion (86.1% funded ratio) by the end of 2014 and to $182 billion (89.1% funded ratio) by the end of 2015.

In 2013, corporate pension plans with the highest equity exposure were the biggest benefactors

April 2nd, 2014 No comments

Milliman today released the results of its 2014 Pension Funding Study (PFS), which analyzes the 100 largest U.S. corporate pension plans. In 2013, these pension plans experienced historic improvement, with plan liabilities decreasing by 7.5% and assets improving by an average of 9.9%. This resulted in a $198.3 billion improvement in the funded status deficit from year-end 2012. While it was a “win-win” year for most sponsors, those with higher equity allocations performed the best.

Last year was a great year for pension funded status and helped reduce much of the underfunding that has persisted since the global financial crisis. Plans that held off on de-risking their plans were the biggest benefactors of the strong equity performance. With 18 of the 100 plans in our study now fully funded, and more hopefully reaching full funding this year, the timing for de-risking activities that can lock in funded status may be optimal.

Study highlights include:

Interest rate increases evident in financial statements. The discount rates used to measure plan obligations increased from 4.04% to 4.75% in 2013. While these rates are still down from a high water mark of 7.63% in 1999, the improvement in 2013 went a long ways toward minimizing the pension funded status deficit.

Investment performance exceeded expectations. The weighted average actual investment return on pension assets for the Milliman 100 companies’ 2013 fiscal years was 9.9%, which compares favorably to the expected return of 7.4%.

Contributions decline significantly during 2013. The $44.1 billion in contributions during 2013 (down $18.1 billion from $62.2 billion in 2012) was the lowest level in five years. The lower-than-expected contributions were likely due to plan sponsors changing their contribution strategies in light of the Moving Ahead for Progress in the 21st Century Act (MAP-21) interest rate stabilization legislation, passed in July 2012.

Pension expense decreased. Favorable investment returns in 2012 offset the impact of declining discount rates in that year, leading to a reduced level of pension expense: a $32.1 billion charge to earnings. This is $23.7 billion lower than the record high pension expense in 2012.

Market capitalization of these plans up more than 20%. The favorable equity market performance during 2013 increased the total market capitalization for the Milliman 100 companies by 21.2%. When combined with the decrease in pension obligations, this resulted in a decrease in the unfunded pension liability as a percentage of market capitalization, from 7.3% at the end of 2012 to 3.0% at the end of 2013.

Asset allocations remain relatively stable. The trend toward implementing liability-driven investing (LDI) continued in 2013, but at a slower pace. Overall allocations to equities remained largely unchanged in 2013. With strong 2013 returns across most equity markets and losses in many fixed-income sectors, it is evident that many plans rebalanced during the year by moving money from equities, and possibly other asset classes, to fixed income.

What to expect in 2014. Given the funded status gains in 2013, 2014 contributions are expected to decrease compared to those made in 2013. Plans already at surplus at the end of 2013 will have reduced incentive to further fund their plans in 2014. For some plans that had already engaged in LDI or other funded status lock-in strategies, higher contribution levels can be expected.

Given the compound effect of favorable investment returns in 2013 and higher discount rates at year-end, we estimate that 2014 pension expense will decrease to $19 billion, a $13 billion decrease compared with 2013. We may see more than 30 of the Milliman 100 companies with pension income in 2014, a level not seen since 2002.

To read the entire study, click here.

Watch Milliman’s Google+ Hangout where Zorast Wadia and I discuss the results of this year’s PFS with Pensions & Investments Executive Editor Amy Resnick.

Google+ Hangout: Pension Funding Index, March 2014

March 6th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans improved by $11 billion during February, as measured by the Milliman 100 Pension Funding Index. The deficit fell to $131 billion from $142 billion at the end of January, which was due to strong investment performance offsetting an increase in the pension benefit obligation (PBO). As of February 28, the funded ratio increased from 91.0% to 91.8% at the end of January. The funded ratio has declined in the first two months of 2014 when compared with the 95.2% funded ratio as of December 31, 2013.

Index co-author Zorast Wadia discusses the results on Milliman’s monthly PFI Google+ Hangout with Jeremy Engdahl-Johnson.