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Posts Tagged ‘Zorast Wadia’

Milliman Hangout: Pension Funding Index, August 2015

August 11th, 2015 No comments

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 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

August 6th, 2015 No comments

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 four percent. 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

July 9th, 2015 No comments

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.

Longevity plans can benefit employers and employees

June 25th, 2015 No comments

A supplemental defined benefit (DB) longevity plan may be able to reduce pension costs for employers and offer employees an annuitized source of income during their later years in retirement. In their paper “Longevity plans: An answer to the decline of the defined benefit plan,” Milliman consultants Bill Most and Zorast Wadia provide an example of these advantages.

Let’s take a look at a cost example of a 2-percent-of-pay career average plan for a participant hired at age 45 and terminating at age 65. We’ll further assume a starting salary of $60,000 and a 2.5 percent salary scale. This would result in a salary of roughly $106,500 just prior to termination.

The participant’s life annuity benefit commencing at age 75 would be about $31,000 per year. If the participant’s benefit were to be funded over that person’s working career of 20 years, the annual employer cost to fund this benefit would be about 1.8 percent of pay. By comparison, if the participant’s retirement benefit were to commence at age 65 under current Internal Revenue Service rules, the annual employer cost to fund this benefit would be about 2.5 percent of pay.

Thus, by limiting benefit eligibility until age 45 and by not allowing benefits to commence earlier than age 75, the cost of this plan would be relatively low to fund. Using this same example, while extending benefits commencement to age 80, the employer’s cost would be significantly lower at about 1.5 percent of pay.

Having a longevity plan with a simplistic design in which only life annuities can be offered directly addresses the issue of longevity risk… Aside from single life annuities and 75 percent joint and survivor options for married participants, no other types of benefits would be allowed. Lump-sum amounts will presumably be available via a retiree’s defined contribution plan and personal savings.

Collecting an annuity benefit from the supplementary defined benefit plan would not preclude a retiree receiving a lump-sum benefit from the defined contribution plan. It would just make it easier for the retiree to make decisions on how best to manage his or her lump-sum benefit from a withdrawal and consumption perspective; the participant would know exactly when his lifetime annuity benefit would start, no earlier than age 75 in our proposed plan. Early retirement would be restricted from the proposed longevity plan because the concern is for the latter years of retirement and the understanding is that other sources of savings should be enough to get retirees through the initial years of retirement.

Pension funded status improves by $31 billion in May

June 4th, 2015 No comments

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In May, these pension plans experienced a $31 billion increase in funded status based on a $3 billion decrease in asset values and a $34 billion decrease in pension liabilities. The funded status for these pensions increased from 82.6% to 84.1%.

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The second quarter of 2015 has reversed the losses we saw in the first quarter. For the year these pensions have now experienced a $50 billion decrease in the funded status deficit, thanks to rising interest rates. The discount rate that determines pension liabilities is now at 3.97%, and getting back above 4% would continue to push pension funding in the right direction.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.32% by the end of 2015 and 4.92% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 91% by the end of 2015 and 105% by the end of 2016. Under a pessimistic forecast with similar interest rate and asset movements (3.62% discount rate at the end of 2015 and 3.02% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 80% by the end of 2015 and 72% by the end of 2016.

Milliman infographic: Pension liabilities

May 18th, 2015 No comments

When the discount rate increases the projected benefit obligation (PBO), or pension liability, decreases, and vice versa. This relationship explains the volatile nature of pension liabilities and demonstrates why liabilities-driven investment strategies, which manage funded status and limit volatility of pension liabilities and asset returns, are useful.

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To read the entire Corporate Pension Funding Study, click here.

Pension funded status improves by $40 billion in April

May 7th, 2015 No comments

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In April, these pension plans experienced a $40 billion increase in funded status based on a $2 billion decrease in asset values and a $42 billion decrease in pension liabilities. The funded status for these pensions increased from 80.9% to 82.6%.

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Someone once said April is the cruelest month, but for these pensions last month it was less cruel than what happened over the course of the first quarter. We’re still a long ways away from full funded status, but the slight rise in interest rates at least moved things in the right direction to start the second quarter of 2015.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.22% by the end of 2015 and 4.82% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 91% by the end of 2015 and 105% by the end of 2016. Under a pessimistic forecast with similar interest rate and asset movements (3.42% discount rate at the end of 2015 and 2.82% by the end of 2016, with 3.3% annual returns), the funded ratio would decline to 78% by the end of 2015 and 70% by the end of 2016.

Pension funded status drops by $6 billion in March

April 23rd, 2015 No comments

Milliman today released the results of its latest Pension Funding Index, which analyzes the 100 largest U.S. corporate pension plans. In March, these pension plans experienced a $6 billion decrease in funded status based on decreases in asset values and increases in pension liabilities. This month’s analysis reflects the results of the 2015 Pension Funding Study, published on April 2nd.

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Last month these pensions continued to languish in the low-interest-rate doldrums. Whether or not rates climb between now and the end of the year will likely determine whether or not these pensions can meaningfully reduce the funded status deficit before year-end.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.10% by the end of 2015 and 4.70% 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 104% by the end of 2016. Under a pessimistic forecast with similar interest rate and asset movements (3.20% discount rate at the end of 2015 and 2.6% by the end of 2016, with 3.3% annual returns), the funded ratio would decline to 75% by the end of 2015 and 68% by the end of 2016.

Milliman Hangout: 2015 Pension Funding Study

April 3rd, 2015 No comments

The funded status of the largest 100 corporate defined benefit plans declined by $131.3 billion in 2014 as measured by the 2015 Milliman 100 Pension Funding Study (PFS). Plan liability increases overwhelmed robust asset investment gains and annual contributions declined to $39.8 billion from $44.2 billion in 2013. PFS coauthors John Ehrhardt and Zorast Wadia discuss the results of the study with Amy Resnick, executive editor of Pensions & Investments, in this Milliman Hangout.

To read Pensions & Investments’ coverage of the study, click here.
To download the 2015 Milliman 100 Pension Funding Study, click here.

Discount rates deepen pension funding deficit and make 2014 a banner year for liability-driven investing

April 2nd, 2015 No comments

Ehrhardt-JohnMilliman today released the results of its 2015 Pension Funding Study, which analyzes the 100 largest U.S. corporate pension plans. In 2014, these pension plans experienced a funded status decline despite a 10.9% investment return, with plan liabilities for these 100 plans increasing by $189.2 billion and assets increasing by $57.9 billion. This resulted in a $131.3 billion increase in the funded status deficit, representing a funding ratio decline of 6.1%.

Pension plan sponsors may be feeling whiplash after the last three years. In 2012, plans with the heaviest investment in fixed income experienced superior returns. In 2013, we saw the opposite: Plans with heavy equity allocations fared the best. Now with these latest results, we’ve again reversed ourselves, as plans with the highest fixed income allocation once again outpaced the field despite a strong year for equities. This whiplash is the result of discount rates that hit a record low this year, and continue to define pension funding status.

Study highlights include:

Asset allocations shift toward fixed income. Equity allocations in the pension portfolios dropped to 37.3% by the end of 2014, the lowest in the 15-year history of this study. The companies included in this study have generally shifted toward higher allocations in fixed income investments.

Risk transfer trend continues. Some plan sponsors engaged in pension risk transfer activities, including two well-publicized pension buyouts conducted for two of the Milliman 100 companies (Bristol-Myers Squibb and Motorola).

New mortality assumptions increase pension liabilities by 3.4%. The magnitude of these increases is contingent on age, gender, and other demographic characteristics of each plan’s participants. Based on the footnote disclosures at year-end 2014, the new Society of Actuaries mortality tables led companies to update mortality assumptions, increasing pension liabilities by approximately $38.3 billion, or 3.4%, at least among those plans that disclosed the impact.

Contributions decline during 2014. The $39.8 billion in contributions during 2014 were the lowest level since 2008 and marked a $4.4 billion decrease from 2013 contribution levels. The lower-than-expected contributions were likely due to plan sponsors changing their contribution strategies in light of the Highway and Transportation Funding Act of 2014 (HATFA) interest rate stabilization legislation, enacted in August 2014.

Pension expense increases. Robust investment gains in 2013 were partially offset by the impact of lower contributions and increasing discount rates during 2013, producing a net increase of $4.8 billion and resulting in a total of $37.1 billion in pension expense. Pension expense hit an all-time high at $56.1 billion in 2012.

What to expect in 2015. The passage of HATFA may result in lower contributions on par with those seen in 2014. However, for plans already engaged in liability-driven investing (LDI), higher contribution levels can be expected. The lower discount rates at the end of 2014 are expected to lead to significant 2015 pension expense increases because discount rates for the coming fiscal year are set at the start of the fiscal year. This does not factor in any possible plan de-risking activity.