Tag Archives: John Ehrhardt

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 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 performance 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.

Corporate pension funded status drops by $3 billion in November

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In November, these pension plans experienced a $3 billion decrease in funded status, based on a $3 billion decrease in asset values and no movement in pension liabilities. The funded status for these pensions decreased from 83.5% to 83.3%.

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November was another middling month for these pensions, and with the calendar flipping soon the book is nearly written on 2015. But with the Federal Reserve potentially raising interest rates at the end of the calendar year, it could be an exciting finish.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.81% by the end of 2016 and 5.41% by the end of 2017) and asset gains (11.3% annual returns), the funded ratio would climb to 97% by the end of 2016 and 111% by the end of 2017. Under a pessimistic forecast (3.51% discount rate at the end of 2016 and 2.91% 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.

Corporate pension funded status improves by $25 billion in October

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In October, these pension plans experienced a $25 billion increase in funded status based on a $33 billion increase in asset values and an $8 billion increase in pension liabilities. The funded status for these pensions increased from 81.7% to 83.3%.

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October was a great month for these pensions, but it may be too little too late as far as 2015 is concerned. Overall funded status has improved by only 1.8% this year, and this would be worse if it weren’t for interest rates inching in the right direction to reduce pension liabilities.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.26% by the end of 2015 and 4.86% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 85% by the end of 2015 and 98% by the end of 2016. Under a pessimistic forecast (4.06% discount rate at the end of 2015 and 3.46% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 82% by the end of 2015 and 75% by the end of 2016.

Corporate pension funded status declines by $28 billion in September

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In September, these pension plans experienced a $28 billion decrease in funded status based on a $19 billion decrease in asset values and a $9 billion increase in pension liabilities. The funded status for these pensions decreased from 83.3% to 81.7%.

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The calendar year began with strong equity performance that seemed so promising, and yet here we are looking at an overall decline in equities for the year. It will take a massive rally in the fourth quarter for these 100 pensions to sniff their annual expected return of 7.3%.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.34% by the end of 2015 and 4.94% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 85% by the end of 2015 and 97% by the end of 2016. Under a pessimistic forecast (4.04% discount rate at the end of 2015 and 3.44% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 80% by the end of 2015 and 73% by the end of 2016.

Corporate pension funded status drops by $22 billion in August

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In August, these pension plans experienced a $22 billion decrease in funded status based on a $42 billion decrease in asset values and a $20 billion decrease in pension liabilities. The funded status for these pensions decreased from 84.9% to 83.4%.

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Most of the time, interest rate movements drive pension funded status, but the stock market volatility we saw in August stole the show. For the year, these pensions had performed well on the asset side, but August erased all those gains.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.43% by the end of 2015 and 5.03% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 87% by the end of 2015 and 100% by the end of 2016. Under a pessimistic forecast (4.03% discount rate at the end of 2015 and 3.43% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 81% by the end of 2015 and 74% by the end of 2016.

Milliman Hangout: Pension Funding Index, August 2015

The funded status of the 100 largest corporate defined benefit pension plans worsened by $16 billion during July, as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose to $261 billion, which was primarily due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. Pension asset gains during July helped to dampen the funded status decrease. The funded ratio declined from 85.5% to 84.8%. This breaks the upward momentum from the second quarter of 2015, where the funded ratio had increased for three consecutive months.

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

Corporate pension funded status drops by $16 billion in July

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In July, these pension plans experienced a $16 billion decrease in funded status based on a $10 billion increase in asset values and a $26 billion increase in pension liabilities. The funded status for these pensions decreased from 85.5% to 84.8%.

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We finally saw an interruption to the streak of improving pension funded status in July. Interest rates drove up pension liabilities last month, but fortunately the discount rate remained above 4%. Interest rates remain the big story this year, contributing to a $66 billion decrease in the pension benefit obligation.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.39% by the end of 2015 and 4.99% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 90% by the end of 2015 and 103% by the end of 2016. Under a pessimistic forecast (3.89% discount rate at the end of 2015 and 3.29% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 82% by the end of 2015 and 74% by the end of 2016.

Corporate pension funded status improves by $36 billion in June

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In June, these pension plans experienced a $36 billion increase in funded status based on a $28 billion decrease in asset values and a $64 billion decrease in pension liabilities. The funded status for these pensions increased from 84.1% to 85.6%.

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These pensions cleared an important hurdle this month, with the discount rate that determines pension liabilities climbing above 4% following a seven-month streak of flirting with all-time lows. It’s no coincidence that we’ve seen a related decrease in pension liabilities, with rising discount rates reducing liabilities by $92 billion year-to-date and contributing to a strong quarter for the 100 largest corporate pensions.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.55% by the end of 2015 and 5.15% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 92% by the end of 2015 and 105% by the end of 2016. Under a pessimistic forecast (3.95% discount rate at the end of 2015 and 3.35% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 82% by the end of 2015 and 74% by the end of 2016.

To take or not to take, that is the lump-sum window question

Milliman’s John Ehrhardt was quoted in a recent Wall Street Journal article entitled “Should you take a lump-sum pension offer?” (subscription required). The article highlights one individual’s experience with a former employer’s lump-sum window.

Here’s an excerpt:

One of the simplest ways to evaluate a lump-sum offer is to find out the extent to which the money compensates you for the loss of your pension. I asked New York Life Insurance how much it would cost me today to buy a deferred annuity that will pay me $423 a month, starting in 14 years.

The answer: $45,896, which means my lump sum falls $13,808 short of what I would need to replicate my pension’s guaranteed income with an annuity.

Along the same lines, New York Life says my $32,088 lump sum will buy a monthly income of $296.13 starting at age 65, which is 30% less than my $423 pension benefit.

Of course, I can always invest my lump sum myself. But is it realistic to think that over the next 14 years I will be able to turn my $32,088 into $127,000? That is the amount I would need, starting at age 65, to generate $423 a month using the 4% withdrawal rate that long has been considered a “safe” level of spending over a 30-year retirement.

The answer: probably not, since I will need to earn 10.35% a year, net of investment fees. A portfolio evenly divided between U.S. large-cap stocks and bonds has returned 7.7% a year, on average, since 1926, according to investment-research firm Morningstar.

With a 7.7% annual return, my $32,088 would appreciate to $90,650 by the time I turn 65. Applying the 4% rule yields an initial monthly withdrawal of $302 that, with annual inflation adjustments of 2%, would grow to $423 by the time I am about 82.

…”It’s important to find out whether there are benefits or features that are available to you with the pension that you’d leave on the table if you take the lump sum,” says John Ehrhardt, principal at actuarial consulting firm Milliman.

Every participant’s situation is different. Milliman’s David Benbow offers some perspective in his blog “Lump-sum windows: Too much information?