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Posts Tagged ‘Zorast Wadia’

What steps can a company take to de-risk a pension plan?

July 21st, 2014 No comments

A recent webinar organized by PlanSponsor asks sponsors if pension de-risking is right for their company. The webinar, sponsored by Prudential, features Milliman consultant Stuart Silverman discussing a three-step approach that can help chief financial officers make an informed de-risking decision for their company.

Here is an excerpt from his presentation:

We’ve been advocating a stepwise approach to decision making, and the first step is that the corporation needs to understand all their risks, not just the asset risk but also understanding the liability-related risk.

The second step, once we understand all these risks is helping the corporation understand what their risk tolerance is. Some corporations might have a wide risk tolerance and some may have a very limited risk tolerance.

…After we know what the risks are and what their tolerance is, we want to find the most cost-effective solution to bring their risk into a tolerable range.

In his article “The risks of de-risking pension plans,” Zorast Wadia also provides perspective concerning the risks associated with de-risking a defined benefit plan:

…While every plan sponsor and advisor should be thinking about pension risk management, it is important to exercise care in the strategy that is chosen and in the timing of implementation. Every pension de-risking strategy has its own pluses and minuses and most have an embedded cost associated with them, whether implicit or explicit. Risk management strategies must be customized for organizations depending on their risk tolerance and cash flow requirements. Once a strategy is selected, periodic refinement should also be considered. It’s not a one-size-fits-all approach. Before proceeding down a particular direction, plan sponsors must equally be made aware of both the risk reduction opportunities and the risks of de-risking.

If you are interested in learning more about pension risk management considerations, read Zorast and John Ehrhardt’s four-part PlanSponsor series.

Google+ Hangout: Pension Funding Index, July 2014

July 15th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans increased by $14 billion during June as measured by the Milliman 100 Pension Funding Index (PFI). The deficit improved from $266 billion to $252 billion at the end of June, primarily due to investment gains. As of June 30, the funded ratio rose from 84.5% to 85.3%. However, the funded ratio is still down for the year from 88.3% as of December 31, 2013. June was the first month in 2014 when discount rates increased, but only by 0.02%. Fortunately, the strong year-to-date asset performance has mitigated deeper funded status erosion.

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

Corporate pension funded status improves by $14 billion in June

July 10th, 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 June, these plans experienced a $3 billion decrease in pension liabilities and an $11 billion increase in asset value, resulting in a $14 billion decrease in the pension funded status deficit.

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If you want to understand why pension funded status is down this year, consider the fact that June was the first month in 2014 with rising interest rates—and it’s not like we saw a massive swing. Interest rates continue to be the story with these pensions.

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 4.08% were maintained, funded status would improve, with the funded status deficit shrinking to $228 billion (86.7% funded ratio) by the end of 2014 and to $173 billion (89.9% funded ratio) by the end of 2015.

Google+ Hangout: Pension Funding Index, June 2014

June 18th, 2014 No comments

The funded status deficit of the 100 largest corporate defined benefit pension plans increased by $10 billion during May as measured by the Milliman 100 Pension Funding Index (PFI). The $268 billion deficit at the end of May is primarily due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. Investment gains helped to partially offset the full extent of liability increases in May. During May, the funded ratio fell from 84.7% down to 84.3%.

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

Pension funded status deficit increases by $10 billion in May, reaches $268 billion

June 6th, 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 May, these plans experienced a $29 billion increase in pension liabilities and a $19 billion increase in asset value, resulting in a $10 billion increase in the pension funded status deficit.

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In every month of 2014 so far we have seen a decline in interest rates. These pensions have experienced a $43 billion increase in assets, but the market gains have been dwarfed by a $125 billion increase in liabilities.

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 4.06% were maintained, funded status would improve, with the funded status deficit shrinking to $241 billion (86.0% funded ratio) by the end of 2014 and to $187 billion (89.2% funded ratio) by the end of 2015.

Considerations for de-risking defined benefit plans

May 23rd, 2014 No comments

PlanSponsor has published a four-part series of articles authored by Milliman’s Zorast Wadia and John Ehrhardt. The series focuses on pension risk as well as measures that employers should consider in de-risking their corporate defined benefit (DB) plans.

De-risking corporate defined benefit pension plans
The first article provides an overview of the corporate DB landscape since Milliman’s inaugural Pension Funding Study in 2000. The article also highlights a three-step process for plan sponsors pondering a de-risking strategy.

Major risks facing DB plans today
Employers should understand their current pension risks before implementing a de-risking strategy. This article details several risks sponsors must deal with.

Managing and mitigating DB plan risk
The final two articles address a de-risking framework referred to as “the three Ms”: managing, mitigating, and moving risk. This article offers perspective on the first two.

Moving DB risk, and the risks of de-risking
Zorast and John discuss the last of the three Ms, moving risk, in this article. They also pose questions that can help sponsors understand the risks associated with pension de-risking.

Google+ Hangout: Pension Funding Index, May 2014

May 12th, 2014 No comments

The funded status deficit of the 100 largest corporate defined benefit pension plans increased by $15 billion during April as measured by the Milliman 100 Pension Funding Index (PFI). The $258 billion deficit at the end of April is primarily due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. Asset improvements helped to partially offset the full extent of liability increases in April. From the end of March through April 30, the funded ratio fell from 85.3% to 84.7%.

PFI co-author Zorast Wadia offers some perspective on the latest results in this Milliman Google+ Hangout.

Pension funded status deficit increases by $15 billion in April

May 7th, 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 April, these plans experienced a $21 billion increase in pension liabilities and a $6 billion increase in asset value, resulting in a $15 billion increase in the pension funded status deficit.

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We keep slipping further and further away from full funding. The historic improvement of 2013 has been countered by a $72 billion decrease in funded status so far in 2014, with falling interest rates driving much of the change.

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 4.20% were maintained, funded status would improve, with the funded status deficit shrinking to $228 billion (86.5% funded ratio) by the end of 2014 and to $175 billion (89.7% funded ratio) by the end of 2015.

What to look ahead for in pension risk management

May 1st, 2014 No comments

Defined benefit plan sponsors are concerned about contribution and funded status volatility. Some recent pension risk management strategies have focused on liability-driven investing (LDI) and lump-sum distributions. In this article, Milliman consultants Tim Connor, Scott Preppernau, and Zorast Wadia discuss in general terms methods that plan sponsors may implement to de-risk their pensions moving forward.

Here is an excerpt:

We suspect that 2014 will see a continued trend of sponsors looking to de-risk their plans through the various methods mentioned above. In addition, we believe sponsors will investigate the benefits of a hybrid plan design such as the variable annuity plan for the reasons mentioned above.

Another trend likely to continue is the implementation of lump-sum windows or permanently increased lump-sum thresholds. These strategies have found favor with many plan sponsors, particularly in response to recent increases in Pension Benefit Guaranty Corporation (PBGC) premiums. Because PBGC premiums include a per-participant charge, and because that charge has increased substantially in recent years, sponsors will no doubt continue to take a hard look at the idea of offering lump sums if it translates into fewer participants for whom they must pay those premiums. In addition, the rates utilized to pay out lump sums have been fully phased in for a few years now, from the previous basis of 30-year Treasury rates. That old basis resulted in a period of time where lump sums were seen as costly to sponsors. That is no longer the case. On a U.S. GAAP accounting basis, plans are valuing liability at rates that are close to the rates that are now utilized to pay lump sums. In other words, there is no longer much of an accounting gain or loss to a plan that pays out a lump sum. Yet, it does accomplish de-risking by transferring management of the pension to the participant.

On the investment side, we also expect sponsors to explore some nontraditional de-risking solutions. Not all sponsors share the belief that leaving the space of equity investments makes sense in the long term. Some feel they can’t afford not to be seeking returns in the market. For them, a tail risk hedging investment strategy can be an attractive de-risking solution. A typical strategy allows for upside through equity investments, while at the same time mitigating downside losses that occur in volatile, declining markets. The concept of hedging tail risk is quite familiar to the insurance industry, which utilizes such strategies to manage its own risk in guaranteeing certain products, such as variable annuities. It makes natural sense for defined benefit plan sponsors to incorporate the approach to de-risk their own pension promises.

Read Grant Camp and Kelly Coffing’s article Making the case for variable annuity pension plans (VAPPs) to learn more about the variable annuity pension plan design. Also, for more Milliman perspective on lump-sum distributions, click here.

The risks of de-risking

April 24th, 2014 No comments

Some sponsors are thinking about de-risking their defined benefit plans. Before deciding on a pension risk management strategy, plan sponsors should understand the financial implications associated with each approach. Zorast Wadia examines lump-sum windows, plan overfunding, and replacement benefits in his article “The risks of de-risking pension plans.”

This excerpt highlights the risks presented by lump-sum windows:

In the past couple of years quite a few plan sponsors have expressed interest in reducing their pension footprints. Several implemented lump sum windows during 2012 and 2013, giving former employees with vested benefits a one-time opportunity to receive single sum distributions. Once a lump sum distribution is taken by a participant, the plan sponsor no longer bears future pension risk with respect to that participant’s benefit. Besides risk reduction, there are also other good reasons for this de-risking technique, such as lowering flat-rate Pension Benefit Guaranty Corporation (PBGC) insurance premiums and reducing future plan administration costs. However, plan sponsors must consider the opportunity costs associated with implementing a lump sum window. These costs include:

• Missing out on investment gains as assets leave the plan upon a lump sum cash out
• Anti-selection from participants
• Higher plan contributions

Regarding plan overfunding, Wadia says:

With the announced rises in PBGC premiums over the next several years, many plans sponsors have attempted to de-risk their plans of the rise in premiums by accelerating funding.

…For plans that have achieved full funding positions, they will certainly have the advantage of showing pension surpluses on their balance sheets and recording pension income on P&L statements, all the while having the ability to take contribution holidays. However, should we experience another interest rate rebound as we did during 2013, or a sudden spike in interest rates should unemployment figures dramatically improve, several plans will find themselves greatly overfunded.

… A plan’s overfunding does not get returned to the plan sponsor, unless the plan is terminated, and even then, there is still the payment of a large premium to an insurance company for taking on the pension risk, not to mention a hefty 50% excise tax. Therefore, while it is prudent to fully fund a plan, the risk of overfunding does exist and plan sponsors must carefully plan out funded status lock-in strategies when their ultimate funding goals are reached.