Tag Archives: interest rates

Funded status plummets in June, Brexit a possible culprit

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In June, these pension plans experienced a $46 billion decrease in funded status primarily due to a $54 billion increase in pension liabilities. Investment gains partially helped to offset the funded status decline. The funded ratio for these pensions decreased from 77.5% to 75.7% at the end of June. As we pass the midpoint of 2016, the funded status deficit has ballooned to $447 billion, a $140 billion increase over the past six months – Brexit, and an overall discount rate drop of 71 basis points, point to the reasons why.

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Plans with fiscal years ending June 30th had a late-breaking surprise with the passage of Brexit. Falling 23 basis points, US discount rates certainly weren’t immune to the Brexit pain. The silver lining here lies with fixed income investments, which benefited from the discount rate decline. Those with heavy allocations towards fixed income are seeing investment gains.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.75% by the end of 2016 and 4.35% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 81% by the end of 2016 and 93% by the end of 2017. Under a pessimistic forecast (3.15% discount rate at the end of 2016 and 2.55% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 72% by the end of 2016 and 66% by the end of 2017.

Investment gains and favorable interest rate movement power improvement in pension funded status

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In May, these pension plans experienced a $10 billion increase in funded status due to increases in pension asset values and decreases in in pension liabilities. The funded status for these pensions increased from 77.0% to 77.5%.

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For the first time this year we saw positive interest rate movement. Declining discount rates have increased pension liabilities by more than $100 billion for the year. Last month’s modest $7 billion decrease in liabilities is a move in the right direction.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.03% by the end of 2016 and 4.63% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 84% by the end of 2016 and 96% by the end of 2017. Under a pessimistic forecast (3.33% discount rate at the end of 2016 and 2.73% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 73% by the end of 2016 and 67% by the end of 2017.

Spot rate methodology: Plans are making the switch

Moliterno-MariaIn April, Milliman released its 2016 Pension Funding Study. The study looks at the 2015 year end GAAP accounting results for the 100 largest defined benefit corporate pension plan sponsors. A surprising feature of this year’s study is that 37 of the 100 companies in the study disclosed on their Form 10-K financial statements their intentions to value their 2016 net periodic pension cost results using an alternative spot rate method.

Under the standard method typically used for determining pension expense, the yield curve is used to first determine the present value of plan liability. A single equivalent discount rate is determined that produces the same liability. This equivalent discount rate is then used for all purposes in the expense calculation that requires interest adjustments, including calculation of interest and service costs.

The spot rate method is an alternative method to calculate interest and service costs. Calculating the plan’s liability under the spot rate method is similar to the standard method, as the yield curve is used to determine the liability as the present value of payout streams. However, under the spot rate method, costs are developed using the individual spot rates of the yield curve for each year of expected costs. The interest cost for the year is developed by applying each individual spot rate under the yield curve to each corresponding cash flow discounted to the beginning of the year. Because the current shape of the yield curve has low interest rates in the early years and higher rates over time, payouts expected in the next few years are valued at lower rates than in the future. For example, the December 31, 2015, Citigroup Yield Curve has a rate of 1.34% for year 1 and 4.54% for year 20.

With 37 of the 100 pension plan sponsors analyzed planning on adopting the spot rate methodology in 2016 for some or all of their plans, the change is expected to result in savings in the 2016 pension expense for them. According to the 2016 Pension Funding Study, if all 100 companies adopted the spot rate methodology for all of their plans, the 2016 pension expense savings is estimated to be $14 billion (assuming a 20% reduction in the interest cost for a typical company).

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Corporate pension funded status drops by $25 billion in April

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In April, these pension plans experienced a $25 billion decrease in funded status due to a $4 billion increase in asset values and a $29 billion increase in pension liabilities. The funded status for these pensions decreased from 78.1% to 77.1%.

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For the year these pensions have now declined more than $100 billion in funded status, despite a $6 billion increase in asset values. As we’ve seen so many times, interest rates are driving funded status for these 100 pensions. The discount rate of 3.65% is the second lowest in the history of this study.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.05% by the end of 2016 and 4.65% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 84% by the end of 2016 and 96% by the end of 2017. Under a pessimistic forecast (3.25% discount rate at the end of 2016 and 2.65% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 72% by the end of 2016 and 66% by the end of 2017.

Funded status deficit increases to $390 billion after rates fall below 4%

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In March, these pension plans experienced a $20 billion decrease in funded status, which was due to a $30 billion increase in asset values and a $50 billion increase in pension liabilities. The funded status for these pensions decreased from 78.4% to 77.9%.

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These pensions lost $83 billion in the first quarter. We saw impressive asset performance last month, but with rates slipping back below 4% for the first time since May 2015, we have an even deeper pension funding hole. Hopefully this trip below 4% is brief—the prior visit to record-low territory lasted seven months.

This edition of the PFI reflects the annual update of the Milliman 2016 Pension Funded Study, which was released on April 7.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.23% by the end of 2016 and 4.83% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 86% by the end of 2016 and 98% by the end of 2017. Under a pessimistic forecast (3.33% discount rate at the end of 2016 and 2.73% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 73% by the end of 2016 and 66% by the end of 2017.

Milliman Hangout: 2016 Pension Funding Study

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.

To read the entire study, click here.

The 100 largest U.S. corporate pension plans’ funded status improved by only 0.1% in 2015

Wadia_ZorastMilliman today released the results of its 2016 Corporate Pension Funding Study, which analyzes the 100 largest U.S. corporate pension plans. In 2015, these pension plans experienced a relatively small funding improvement of 0.1%, as 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 increase in funded status. The minuscule improvement belies the fierce dynamics facing these pensions last year.

FIGURE 1: HIGHLIGHTS (FIGURES IN $ BILLION)
FISCAL YEAR ENDING
2014 2015 CHANGE
MARKET VALUE OF ASSETS $1,453.6 $1,377.8 ($75.8)
PROJECTED BENEFIT OBLIGATION $1,779.7 $1,685.2 ($94.5)
FUNDED STATUS ($326.1) ($307.4) ($18.7)
FUNDED PERCENTAGE 81.7% 81.8% 0.1%
NET PENSION INCOME/(COST) ($37.3) ($33.7) $3.6
EMPLOYER CONTRIBUTIONS $39.7 $30.7 ($9.0)
DISCOUNT RATE 4.00% 4.25% 0.25%
ACTUAL RATE OF RETURN 10.8% 0.9% -9.9%
Note: Numbers may not add up precisely, which is due to rounding.

What a strange year for these 100 pension plans. These pensions weathered volatile markets, unpredictable discount rate movements, adjusted mortality assumptions, pension risk transfers, and an industry-wide decline in cash contributions…and yet they still finished the year almost exactly where they began. Given all that transpired in 2015, plan sponsors may be relieved that plans did not experience funded status erosion like that of the prior year. But that doesn’t change the fact of a pension funded deficit in excess of $300 billion.

Study highlights include:

Surprising move toward spot rates. Thirty-seven of the largest 100 plan sponsor companies will record fiscal year 2016 pension expense using an accounting method change linked to the spot interest rates derived from yield curves of high quality corporate bonds. The move to spot rates will result in pension expense savings.

Actual returns well below expectations. Actual plan returns were 0.9% for the year—just a fraction of the expected 7.2%.

Impact of updated mortality assumptions. Pension obligations at the end of 2015 were further reduced to reflect refinements in mortality assumptions. While we are unable to collect specific detail regarding the reduction in PBO, a 1% to 2% decrease has been anecdotally reported. Additional revisions to mortality assumptions may be published in the fourth quarter of 2016.

Cash contributions reduced by almost $9 billion. Approximately $40 billion was contributed in 2014, with that number falling to $31 billion in 2015. The likely cause of the decline: the continuation of interest rate stabilization (funding relief) courtesy of the Bipartisan Budget Act of 2015.

Pension Risk Transfers continue. The estimated amount of pension risk transfers collected from the accounting disclosures was nominally higher in 2015 ($11.6 billion) compared with 2014 ($11.4 billion). It seems likely these transactions may increase in 2016, spurred by the significant increases during 2015 in premiums payable to the Pension Benefit Guaranty Corporation (PBGC); the extension of these premium rate increases was also courtesy of the Bipartisan Budget Act of 2015.

Equity allocations reach a record low. By the end of 2015, equity allocations had dropped to 36.8%, the lowest in the 16-year history of this study. In recent years, the companies in the study generally shifted toward fixed income investments. However, unlike 2014—when plans with higher allocations to fixed income outperformed plans with lower allocations—2015 saw plans with higher allocations to fixed income experience the same rate of return as those with lower allocations.

Under the radar. The 2016 Pension Funding Study also reports on the funded status of Other Postemployment Benefits (OPEB) Plans.

To download the study, click here.

Funded status deficit increases by $35 billion in February, has ballooned by $68 billion so far in 2016

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In February, these pension plans experienced a $35 billion decrease in funded status, which was due to a $5 billion decrease in asset values and a $30 billion increase in pension liabilities. The funded status for these pensions decreased from 80.8% to 79.1%.

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The pension funding deficit continues to move in the wrong direction. In January, poor asset performance drove declining funded status. In February, interest rates were the culprits. We’re off to a rough start in 2016.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.56% by the end of 2016 and 5.16% by the end of 2017) and asset gains (11.3% annual returns), the funded ratio would climb to 89% by the end of 2016 and 102% by the end of 2017. Under a pessimistic forecast (3.56% discount rate at the end of 2016 and 2.96% by the end of 2017 and 3.3% annual returns), the funded ratio would decline to 73% by the end of 2016 and 66% by the end of 2017.

2016 begins with dismal market performance, lowering pension funded status from 82.7% to 80.9%

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In January, these pension plans experienced a $31 billion decrease in funded status that was largely due to a $25 billion decrease in asset values. The funded status for these pensions decreased from 82.7% to 80.9%.

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A 1.46% decline in asset values was the last thing these pensions needed after flat performances in 2015. About the only good news is that the market declines and expanding liabilities weren’t enough to drop these pensions below 80%, as was the case a year ago on January 31.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.74% by the end of 2016 and 5.34% by the end of 2017) and asset gains (11.3% annual returns), the funded ratio would climb to 92% by the end of 2016 and 105% by the end of 2017. Under a pessimistic forecast (3.64% discount rate at the end of 2016 and 3.04% by the end of 2017 and 3.3% annual returns), the funded ratio would decline to 74% by the end of 2016 and 68% by the end of 2017.

Pension funded status improved by 1.2% in 2015

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In December, these pension plans experienced a $7 billion decrease in funded status based on an $18 billion decrease in asset values and an $11 billion decrease in pension liabilities. The funded status for these pensions decreased from 83.3% to 82.7%. For the year, these pensions improved their pension status by $35 billion, growing from 81.5% at the end of 2014 to 82.7% at the end of 2015.

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The good news is that pension funded status improved in 2015. The bad news is that this improvement was underwhelming and we’re basically in the same place we were a year ago, despite cooperative interest rates.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.82% by the end of 2016 and 5.42% by the end of 2017) and asset gains (11.3% annual returns), the funded ratio would climb to 95% by the end of 2016 and 109% by the end of 2017. Under a pessimistic forecast (3.62% discount rate at the end of 2016 and 3.02% by the end of 2017 and 3.3% annual returns), the funded ratio would decline to 75% by the end of 2016 and 69% by the end of 2017.