Tag Archives: Zorast Wadia

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.

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.

Lack of guidance may extend “window” for lump-sum distributions

The Internal Revenue Service (IRS) has not issued the anticipated guidance pension plan mortality tables. A recent Bloomberg BNA article quotes Milliman’s Zorast Wadia discussing what plan sponsors must consider, or reconsider, if the IRS does not issue guidance in the coming months.

“The longer we go into 2016 without seeing the IRS issue guidance on new mortality tables,” the less likely such guidance will be issued this year and in place for plans to follow before 2018, said Zorast Wadia, a principal and consulting actuary in the benefits consulting firm Milliman’s New York office… sponsors may want to begin monitoring interest rates to determine the optimal time to offer lump-sum distributions, Wadia said.

Until recently, many plan sponsors and their advisers have been anticipating that these new mortality tables would be required for plans in 2017. The tables are expected to incorporate longer life expectancies and thus make it more expensive for sponsors to offer lump-sum payouts to participants. A delay in the required use of the tables could affect a sponsor’s decision on whether to offer a lump-sum window—a temporary opportunity to take benefits in that form—in 2016.

Wadia said the IRS must also decide whether its new guidance will incorporate the original base tables issued by the Society of Actuaries [SOA] in 2014 with their revised projection scales issued in 2015 or some other basis.

In a 2015 Benefits Law Journal article, Zorast offered perspective on how implementation of the new SOA mortality tables would reduce the accounting gains that are one of the key economic benefits associated with lump-sum distributions. Therefore, if the IRS does not issue guidance concerning mortality tables this year, plan sponsors may have an extended window to consider the potential benefits of offering lump-sum distributions. Any lump-sum offering would of course require a strong communication and education effort to ensure that plan participants are well equipped to make the important retirement decision that lies ahead.

To read the article, 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.

Is the “window” closing for lump-sum windows?

Offering lump-sum windows to terminated vested participants has financial pros and cons for defined benefit plan sponsors. The regulatory environment in 2016 presents sponsors with a unique opportunity to de-risk pensions through lump-sums. However, sponsors may miss an opportunity to capitalize on the financial advantages of offering lump-sums if they defer to later years. Milliman’s Zorast Wadia provides perspective in his article entitled “De-risking your pension plan: Do new regulations make 2016 the best time to offer lump-sum distributions?

Here is an excerpt:

A golden opportunity—perhaps the last of its kind—for lump-sum windows is coming up in 2016. After that, the window may close for quite some time.

The issue, in brief, stems from a disagreement within the actuarial profession. In October 2014, the Society of Actuaries (SOA) published its updated Mortality Tables Report. The new tables included much more optimistic assumptions about longevity than anything that had come before. If these assumptions are correct, employees would live longer, and the cost of funding their retirement benefits would increase in the 6 to 10 percent range for many plan sponsors.

Many in the actuarial community responded critically to the report, based on the table’s construction methodology and conclusions. At the same time, plan sponsors were concerned because the new longevity assumptions would have the effect of increasing funding requirements, pension expense, and PBGC premiums. Implementation of the new SOA mortality tables would also significantly reduce the accounting gains that are one of the key economic benefits associated with lump-sum distributions.

On July 31, 2015, the IRS stepped in and eliminated the controversy—and uncertainty—at least through the end of 2016 with IRS Notice 2015-53. As Milliman stated in its Client Action Bulletin of August 13, 2015:

For defined benefit plan sponsors (including multiemployer pension plan trustees), the updated tables provide certainty that the [new SOA tables] will not be required for 2016. The use of the IRS’s updated tables will have a more modest effect … on actuarial valuation results, including minimum funding, benefit restrictions, lump-sum calculations, and PBGC premiums.

Looking ahead to 2016, plan sponsors know they can benefit from the accounting gain traditionally received from lump-sum transactions. Furthermore, the US Federal Reserve continues to signal that an interest rate increase will take place before the end of 2015, with additional small rate hikes throughout 2016. Moreover, through the first nine months of the year, corporate bond interest rates, which are the benchmark interest rates used to calculate statutory minimum lump sums, are already up about 35 basis points. In fact, plans using a three-month lookback period for interest rates can already lock in this interest rate basis for minimum lump-sum distributions in 2016. The basic math of lump sums means that lump sums due employees will be smaller because of higher benchmark interest rates.

Additionally, it is rumored that, in 2017, the IRS will adopt a new table reflecting longevity improvements, which may be the SOA table6 or something similar. In other words, plan sponsors considering a lump-sum distribution may want to take advantage of the clearly favorable environment in 2016.

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.