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Posts Tagged ‘John Ehrhardt’

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.

Pension funded status improves by $11 billion

March 6th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans. In February, these plans experienced a $32 billion increase in asset value and a $21 billion increase in pension liabilities, driving an $11 billion improvement in pension funded status.

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In February these plans were buoyed by strong market performance that offset yet another increase in pension liabilities. For the year we’ve seen liabilities increase by more than $80 billion in response to rate movement. These rates have defined pension performance for the last several years. We’ll need some cooperative rates to get back to full funding.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.5% median asset return for their pension portfolios, and if the current discount rate of 4.46% were maintained, funded status would improve, with the funded status deficit shrinking to $58 billion (96.4% funded ratio) by the end of 2014 and turning into a surplus of $34 billion (102.1% funded ratio) accumulating by the end of 2015.

Note that the Milliman annual Pension Funding Study, which provides deeper analysis of these 100 pensions, will be released in early April.

Google+ Hangout: Pension Funding Index, February 2014

February 11th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans dropped by $67 billion during January, as measured by the Milliman 100 Pension Funding Index (PFI). The deficit increased from $73 billion to $140 billion at the end of December 2013, which is primarily due to a 28-basis-point drop in the benchmark corporate bond interest rates used to value pension liabilities.

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

Pension funding status declines to start year

February 7th, 2014 No comments

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans. In January, following a year of major improvement, these plans experienced a $7 billion decrease in asset value and a $60 billion increase in pension liabilities, driving a $67 billion decline in pension funded status. The blow to pension funded status follows an historic year that saw $318 billion in funded status improvement.

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After a win-win year that combined market growth and cooperative interest rates, we’re back to the lose-lose ways where assets fall and liabilities increase. Hopefully this is just a speed bump on the way to 100% funded status. Unfortunately we’re not quite as well positioned to achieve full funded status now as we were at the end of the year.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.5% median asset return for their pension portfolios, and if the current discount rate of 4.55% were maintained, funded status would improve, with the funded status deficit shrinking to $62 billion (96.1% funded ratio) by the end of 2014 and turning into a surplus of $29 billion (101.8% funded ratio) accumulating by the end of 2015.

Google+ Hangout: Pension Funding Index, January 2014

January 16th, 2014 No comments

Finally, a win-win year for the corporate pension plans of the Milliman 100 Pension Funding Index (PFI) as liabilities decreased by $190 billion and assets increased by $128 billion in 2013. This is the first time since our year-end 2007 report that liabilities decreased and assets increased in the same year. Interest rates rose in 2013 after four consecutive years of declines from 2009 to 2012. Investment returns for the Milliman 100 plans exceeded expectations in 2013, as they have done in four out of the last five years.

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

Pension funding status climbs to 95.2% at year-end

January 7th, 2014 No comments

Milliman has released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans. In December, these plans experienced a $10 billion increase in asset value and a $10 billion decrease in pension liabilities, powering a $20 billion improvement in pension funded status. The improvement drove the pension funded status deficit down to $73 billion at year end, culminating a year that saw $318 billion in funded status improvement.

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This was the first win-win year for pensions since 2007, with assets improving by $128 billion and liabilities decreasing by $190 billion. Just to put this rally in perspective: These pensions saw a $337 billion decrease in funded status in 2008, and in the past year we saw a $318 billion improvement. These plans’ performance in 2013 nearly erased the losses of 2008. We are getting back on track.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.5% median asset return for their pension portfolios, and if the current discount rate of 4.83% were maintained, funded status would improve, with the funded status deficit turning positive (100.9% funded ratio) by the end of 2014 and a surplus of $106 billion (106.8% funded ratio) accumulating by the end of 2015.

Google+ Hangout: Pension Funding Index, December 2013

December 13th, 2013 No comments

The funded status of the 100 largest corporate defined benefit pension plans improved by $34 billion during November as measured by the Milliman 100 Pension Funding Index (PFI). The deficit declined from $126 billion to $93 billion at the end of October, which was due to a rise in the benchmark corporate bond interest rates used to value pension liabilities. Asset returns exceeded expectations and contributed to the funding improvement during November as well. The PFI funded ratio increased from 91.9% to 93.9% at the end of October.

PFI co-author Zorast Wadia discusses the latest results on our monthly Google+ Hangout.

Corporate pension funding status nears 94%

December 9th, 2013 No comments

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans. In November, these plans experienced an $11 billion increase in asset value and a $23 billion decrease in pension liabilities. The pension funding deficit decreased to $93 billion at the end of November.

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We haven’t seen an 11-digit pension funding deficit since before the 2008 financial crisis. Pension assets have improved by more than 10% this year, and the pension liabilities have steeply declined. Now we just wait and see how the year concludes, with all eyes focused on both discount rates and financial markets.

Year-to-date, assets have improved by $118 billion and the projected benefit obligation has been reduced by $180 billion, resulting in a massive improvement in funded status and increasing the funded ratio to 93.9%.

Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.5% median asset return for their pension portfolios, and if the current discount rate of 4.78% were maintained, funded status would improve, with the funded status deficit disappearing (100.0% funded ratio) by the end of 2014 and a surplus of $92 billion (105.9% funded ratio) accumulating by the end of 2015.