Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest corporate defined benefit pension plans. In April, these pension plans experienced a $37 billion decrease in funded status based on a $60 billion increase in the pension benefit obligation (PBO) and a $23 billion increase in assets.

We knew that the funded status improvement that has characterized these 100 pension plans so far in 2013 couldn’t last forever. We saw a $106 billion improvement during the first quarter of 2013, thanks to strong investment performance and cooperative interest rates. The strong investment performance continued through April, but interest rates were less cooperative, dropping below 4% for the first time this year and driving a $60 billion increase in the pension benefit obligation.

In April, the discount rate used to calculate pension liabilities decreased from 4.22% to 3.98%, increasing the PBO from $1.651 trillion to $1.711 trillion at the end of the month. The overall asset value for these 100 pension plans increased from $1.367 trillion to $1.390 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.5% median asset return and if the current discount rate of 3.98% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 81.2% to 84.2% by the end of 2013 and to 89.3% by the end of 2014.

Milliman also hosted a live broadcast on Google+, with Zorast Wadia discussing the latest Pension Funding Index.

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest corporate defined benefit pension plans. In March, these pensions experienced a $29 billion increase in funded status based on a $14 billion decrease in the pension benefit obligation (PBO) and a $15 billion increase in assets. The March improvement of $29 billion results in a cumulative improvement of $106 billion in the first quarter of 2013. Note that this latest PFI reflects the data from the annual update of the Milliman 100 companies’ 2012 financial figures included in Milliman’s 2013 Pension Funding Study, published on March 25.

We’ve followed a record deficit at the end of 2012 with a record first quarter to open 2013. The funded ratio has gone from 77% at the end of last year to just under 83% at the end of the first quarter, which is about as strong of a rally as we could hope for in this persistent low-interest-rate environment.

In March, the discount rate used to calculate pension liabilities increased from 4.16% to 4.22%, decreasing the PBO from $1.665 trillion to $1.651 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.351 trillion to $1.366 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.5% median asset return and if the current discount rate of 4.22% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 82.7% to 86.1% by the end of 2013 and to 91.3% by the end of 2014.

The Moving Ahead for Progress in the 21st Century Act (MAP-21) is intended to provide defined benefit sponsors temporary contribution funding relief. Due to low interest rates the past few years, assets have been unable to keep pace with rising liabilities without the need for higher sponsor contributions. MAP-21 eases contribution requirements by allowing the interest rates used to determine minimum required plan contributions to be based upon a 25-year average, subject to an interest rate corridor, instead of a two-year average.

The question arising from this provision of funding relief is what actions can plan sponsors take to de-risk their pensions? In Actuarial Digest’s spring 2013 issue, Zorast Wadia provides perspective on several de-risking options sponsors may be considering. Here is an excerpt:

Given the high sensitivity of plan liabilities to interest rate movements, some plan sponsors have focused on the asset side of the balance sheet. Many asset- liability studies have been conducted since the inception of the Pension Protection Act of 2006. A fairly common outcome is recommendations to plan sponsors to move more investments toward fixed income and away from equity classes. While this measure is driven by risk reduction, it is also flawed in that it serves to lock in a plan’s funded status. If a plan is underfunded, a shift toward fixed income essentially means that the plan sponsor must make even larger plan contributions.

Some plan sponsors are considering cash-borrowing strategies to fully fund their pension plans and then move into all fixed income investments. Borrowing strategies during a low interest rate environment may have their appeal, but it essentially comes down to how a company views its corporate debt versus its pension debt. Companies have to go through this internal accounting exercise before deciding whether it makes sense to borrow cash to fully fund their plans. It is also important to note that full funding in this sense really means on a pre-MAP-21 basis. Then only will a plan no longer have to pay variable rate PBGC premiums, which would amount to a cost savings. Also, once fully funded, it is important to lock in that fully funded status. That is where a liability-driven investment strategy comes into play; an asset strategy that is designed to mimic liability movements. The downside to this strategy, besides the borrowing costs, is that plan sponsors are taking themselves out of the market. Should interest rates rise, plan sponsors will miss out on the improvements in funded status and the associated lower required costs to fund their plans. Let’s not forget one of the original appeals of a defined benefit plan: the possibility for investment earnings to lower sponsor benefit costs.

Another de-risking move that has gained some momentum since MAP-21 passed involves extending lump sum distribution offers to terminated vested participants. This move is motivated by the potential to reduce the size of the pension plan. A smaller plan will be subject to lower PBGC premiums and less subject to longevity risk associated with the participants who are no longer in the plan. It is also motivated by the current declining interest rate environment. The interest rate basis used to determine lump sum options is generally known prior to the plan year in which the distributions occur. After observing how interest rates were falling throughout most of 2012, many plan sponsors decided to offer participants lump sum windows (essentially a limited one-time take it or leave it opportunity) during the final quarter of 2012. The 2012 lump sum payouts would be based on higher 2011 interest rates and thus be lower than they would have been had the lump sum payout occurred in the following year.

To read the entire article, click here.

Milliman today released the results of its 2013 Pension Funding Study, which analyzes the 100 largest US corporate pension plans. In 2012, these pension plans were once again defined by record-low discount rates, which led to record-high pension obligations and a $388.8 billion pension funding deficit—a $61.1 billion deficit increase in 2012. Since the end of 2010, declining interest rates have widened the pension funding deficit by more than $150 billion, driving record deficits in each of the last two years. The pension funding ratio stood at 77.2% at year’s end, down from 79.2% at the end of 2011. The deficit increase and reduced funding ratio in 2012 happened in spite of efforts by certain plan sponsors to de-risk their pension plans.

Many plan sponsors made significant efforts to de-risk their pension plans in 2012, even as record-low interest rates made it an expensive time to pursue these kinds of risk management efforts. But there was no fighting the inevitable gravity of these low interest rates, as the 100 pension plans in our study saw a cumulative deficit increase in excess of $60 billion . All this in spite of strong asset performance that exceeded the expectations of most plan sponsors. People are probably getting tired of hearing me say this, but pension funding status will continue to be tied to interest rates. If rates stay low—and all indications are that they will through 2014—these pension plans will struggle to fill their funding gap.

Major pension stories for 2012 include:

De-risking results in shakeup at the top of the Milliman 100. Throughout the 13 years Milliman has performed this analysis, General Motors has been the largest pension plan, based on total assets. That changed in 2012 after GM pursued de-risking efforts. IBM—long a solid #2 in the study—is now the largest pension plan in the Milliman 100. Other large plan sponsors, including Ford and Verizon, also pursued de-risking. Across the entire Milliman 100, de-risking by at least 15 plan sponsors resulted in a cumulative $45 billion reduction in plan obligations.

Asset increases and $61.5 billion in contributions were not enough to close the deficit. With an 11.7% investment return in 2012, the Milliman 100 pension plans performed better than they expected—but it wasn’t enough to offset the ballooning deficit. Nor were contributions in excess of $60 billion.

Record contributions in 2012—but not at the level expected. While the $61.5 billion in contributions during 2012 was significantly greater than most prior years, it exceeded the 2011 total by only $6.3 billion and the 2010 total by only $1.8 billion. The lower-than-expected contributions were likely due to plan sponsors electing to change their contribution strategy following the passage of the MAP-21 interest rate stabilization legislation.

Another record year for pension expense. Following a $38.5 billion charge to earnings in 2011, the Milliman 100 pension plans again set a new record for total pension expense, with a $55.8 billion charge to earnings. The $17.3 billion increase in pension expense is consistent with the prediction of $16 billion reported by last year’s study. This year’s study predicts a $7.6 billion increase in pension expense in 2013.

Asset allocations relatively stable. In 2011, plan sponsors decreased the percentage of assets invested in equities by more than 5%. In 2012, the percentage of assets allocated to equities remained relatively stable (from 38.2% to 38.0%), as the move toward liability-driven investments (LDI) slowed. Because of the strong performance of equities in 2012, plans with higher equity allocations had better investment returns than those with higher allocations to fixed-income investments.

What to expect in 2013. With the Federal Reserve Board indicating its intention to keep interest rates low through 2014, pension obligations will remain high. The year is off to a strong start from an equity perspective, and de-risking may continue in 2013. But until interest rates move favorably, the pension funding deficit is likely to endure.

Milliman’s Corporate Pension Funding Study is an annual analysis of the 100 largest U.S. corporate defined benefit pension plans. Study co-author John Ehrhardt discusses new funded status results, General Motor’s de-risking measures, and 2013′s outlook in this preview.

The 2013 Milliman Pension Funding Study will be released on Monday, March 25. Contact us at pensionfunding@milliman.com to be added to our mailing list.

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In February, these pensions experienced a $6 billion decrease in funded status based on a $17 billion increase in the pension benefit obligation (PBO) and an $11 billion increase in assets. February’s growth in the funded status deficit follows a near-record improvement of $107 billion in January and still leaves these pensions in better shape than at the end of 2012.

Assets continued to climb in February, but as usual it was interest rates that ultimately drove pension funded status. Thanks to cooperative interest rates in January, we are still ahead for the year. Even with the Dow hitting new record highs, it will ultimately be interest rates that dictate the pension funding story in 2013.

In February, the discount rate used to calculate pension liabilities decreased from 4.45% to 4.40%, increasing the PBO from $1.666 trillion to $1.683 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.361 trillion to $1.372 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.8% median asset return and if the current discount rate of 4.40% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 81.5% to 85.6% by the end of 2013 and to 90.6% by the end of 2014.

These figures are tentative and will be revisited as part of the 2013 Milliman Pension Funding Study, to be released later this month. Milliman expects that de-risking activities made by some of these companies will probably lower asset and liability figures, which may slightly negatively affect the plans’ overall funded status.

On February 11, the IRS released the Moving Ahead for Progress in the 21st Century Act (MAP-21) interest rates that will be used to compute minimum contribution requirements for single-employer defined benefit plans for 2013 plan years: 4.94%/6.15%/6.76%. These rates are down about 0.70% from 2012. What does this mean for the typical pension plan? Even with good asset returns during 2012, most pension plans will see their funded status worsen significantly. And this in turn means increased funding requirements, for both minimum funding requirements for 2013 and potentially for avoiding benefit restrictions.

If benefit restrictions are an issue for your plan, then a lot depends on the plan’s funded status for 2012. If the plan was between 80% and 90% funded for 2012, additional funding could be due as early as March 31, 2013 for calendar year plans. In addition, any remaining required funding for 2012 may need to be accelerated from September 15, 2013 to March 31, 2013. If the plan was over 90% funded for 2012, additional funding may be due by September 15, 2013, for calendar year plans.

If benefit restrictions are not a concern for your plan, the minimum funding rules allow you to put off the increased funding requirements until 2014. Holding off until then will likely translate into a hefty increase from 2013. Now is the time to look ahead and perhaps smooth out the contribution requirements over the next 24 months. Not only will this alleviate some of the volatility, but a second benefit is lower Pension Benefit Guaranty Corporation (PBGC) premiums for 2014, as the trust assets will be higher on January 1, 2014.

Speaking of lowering PBGC premiums, there may also be an opportunity to lower the 2013 premium with just a little planning and no extra funding. Here’s how. First step is to satisfy the 2012 funding requirement prior to or at the same time that the first quarterly contribution is due for 2013 (April 15, 2013, for calendar year plans), instead of waiting until the last possible day (September 15, 2013, for calendar year plans). Second step is to contribute whatever amount you planned at the first quarterly requirement date for 2013, and classify that contribution as for the 2012 plan year. Because the 2012 minimum funding requirement has already been satisfied, this creates an excess amount for 2012 that can be added to the prefunding balance. The prefunding balance can then be immediately used to satisfy the first quarterly requirement for 2013. The best part is that the process can be repeated for the second quarterly requirement (July 15, 2013, for calendar year plans), doubling the premium savings. Only caveat to this process is that the plan needed to be at least 80% funded for 2012 in order to use the prefunding balance in 2013. Most plans that adopted the MAP-21 rates for 2012 should be eligible.

While MAP-21 provided some welcome relief to defined benefit plan sponsors regarding plan funding, it is always a good time to assess the situation and see if any strategies beyond simply contributing the minimum required amounts might be worthwhile.

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In January, these pensions experienced a $106 billion improvement in funded status based on an $83 billion decrease in the pension benefit obligation (PBO) and a $23 billion increase in assets. The $106 billion advancement in January completely reverses a $74 billion deficit increase over the course of 2012 and sets off these 100 plans on a strong start in 2013.

In January we saw one of the more cooperative interest rate environments in recent memory. Over the course of 2012, plunging interest rates drove a ballooning pension funded status deficit. Now these rates have helped deflate that deficit. It’s early, but $106 billion in improvement is welcome news.

In January, the discount rate used to calculate pension liabilities increased from 4.18% to 4.45%, decreasing the PBO from $1.748 trillion to $1.665 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.337 trillion to $1.360 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.8% median asset return and if the current discount rate of 4.45% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 81.7% to 86.1% by the end of 2013 and to 91.1% by the end of 2014.

These figures are tentative and will be revisited as part of the 2013 Milliman Pension Funding Study, to be completed in March. Milliman expects that de-risking activities made by some of these companies will probably lower asset and liability figures, which may slightly negatively affect the plans’ overall funded status.

News that AT&T recorded a $10 billion fourth-quarter charge for its pension plan emphasizes the trouble many companies are having funding pensions. In this FOX Business article, John Ehrhardt discusses how historically low interest rates have hindered the funding status of the nation’s largest 100 corporate defined benefit plans. The result was the largest year-end funding deficit in the 12 years Milliman has analyzed these pension plans.

Here is an excerpt from the article:

Historically low rates have deepened the pension funding deficit in record amounts for these plans in 2012, Milliman says, with the top 100 US-based plans on average funded just 76.4% as of the end of last year – [down from 78.7% at the beginning of 2012].

Telecom giant AT&T has already warned in an SEC filing it would book a $10 billion charge for the fourth quarter due to its pension- and retirement-benefit plans, and Verizon (VZ) has warned it may book charges in the last quarter of 2012 as well due to its pensions.

A year of ballooning pension shortfalls has the 100 plans’ deficit now at $411.8 billion, $74 billion higher than it was as of year-end 2011.

That’s the largest annual funding deficit in the dozen years Milliman has conducted this analysis.

And that shortfall comes even though the plans had a decent year of returns on assets largely due to improving equities, posting a $90 billion gain, or a return of 9.3%, Milliman says.

The shortfall came from the liability side of the balance sheet, as low interest rates created a $164.8 billion increase in the plans’ pension benefit obligations, Milliman’s John Ehrhardt, co-author of the study, says.

“People may be getting tired of hearing me saying it but interest rates have been the story for the last four years and that’s not going to change in 2013,” Ehrhardt said in a statement.

Even though these 100 corporate pension plans have beaten their expected returns on assets for three of the last four years, Milliman’s John adds, the liability losses from plunging interest rates more than offset the investment gains. The companies book the deficit as a charge against shareholder equity on their balance sheets.

To read Milliman’s latest Pension Funding Index, click here.

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In December, these pensions experienced a $54 billion increase in funded status based on a $46 billion decrease in the pension benefit obligation (PBO) and a $8 billion increase in assets. The $54 billion improvement in December follows a $34 billion improvement in November, but it would still take many more months of improvement to make up for a year of ballooning pension deficit. At year end, the deficit of $412 billion is $74 billion higher than it was when 2011 ended.

It was a good year on the asset side, with these pensions experiencing a $90 billion gain. But it was a rough year on the liability side, with interest rates driving a $164 billion increase in the pension benefit obligation. People may be getting tired of hearing me saying it but interest rates have been the story for the last four years and that’s not going to change in 2013. 

In December, the discount rate used to calculate pension liabilities increased from 4.05% to 4.18%, decreasing the PBO from $1.794 trillion to $1.748 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.328 trillion to $1.336 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.18% were to be maintained throughout 2013 and 2014, these pensions would improve the pension funded ratio from 76.4% to 81.0% by the end of 2013 and to 85.7% by the end of 2014.

These year-end figures are only tentative, and will be revisited when the 2013 Milliman Pension Funding Study is completed in March. De-risking activities made by some of these companies will probably lower asset and liability figures, which we expect to have a slightly negative impact on the overall funded status of these plans.