Tag Archives: John Ehrhardt

August resembles July as record-low interest rates continue to drive the pension funding deficit

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In August, these pension plans experienced a $4 billion decrease in funded status due an increase in pension liabilities and flat asset returns. The funded status for these pensions inched downward from 75.8% to 75.7%.

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Not much movement in pension funding last month. Assets didn’t budge in August, and the discount rate reached yet another record low with a modest step down. For the last three months, the funded ratio has barely moved in spite of continued funding by plan sponsors.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.52% by the end of 2016 and 4.12% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 79% by the end of 2016 and 91% by the end of 2017. Under a pessimistic forecast (3.12% discount rate at the end of 2016 and 2.52% 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.

Record-low interest rates drive another increase in the pension funding deficit

Wadia_ZorastMilliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In July, these pension plans experienced a $5 billion decrease in funded status due to a $29 billion increase in pension liabilities that eclipsed a strong month for asset returns. The funded status for these pensions was essentially flat, shifting from 75.6% to 75.7%.

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Everyone is thinking about records this week with the Olympics underway, but a record-low discount rate is not something these pensions will be applauding. The discount rate’s plunge to 3.33% blew away the prior record of 3.41% from January 2015. Year-to-date, these low rates have contributed to a $186 billion increase in pension liabilities.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.58% by the end of 2016 and 4.18% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 80% by the end of 2016 and 92% by the end of 2017. Under a pessimistic forecast (3.08% discount rate at the end of 2016 and 2.48% 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.

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 that was 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 30 had a late-breaking surprise with the passage of Brexit. Falling 23 basis points, U.S. 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 toward 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.

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.