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Posts Tagged ‘Zorast Wadia’

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.

Pension plan risks will dictate de-risking behavior

March 13th, 2015 No comments

The de-risking of defined benefit (DB) plans is not expected to cease despite a low interest rate environment. This de-risking activity will depend on how the options available to plan sponsors address their particular pension plan risks. In a recent Bloomberg BNA article, Milliman consultants Zorast Wadia and Stuart Silverman discussed the option of longevity hedging.

Here is an excerpt:

Another type of longevity risk-shifting is longevity hedging, also called longevity swaps, [Zorast] Wadia said.

With the release of the Society of Actuaries’ updated mortality tables, “I wouldn’t be surprised if there’s more interest in 2015 in longevity hedging for pension plans,” Wadia said.

The market for longevity hedging has been growing in Europe and the U.K., but has yet to develop in the U.S., Wadia said.

…Longevity swaps or longevity bonds are a “fairly low-cost approach” to de-risking a pension plan, said Stuart Silverman, also a principal and consulting actuary in Milliman’s New York office.

In a September 2014 Milliman report titled “Understanding Risks and Solutions: A Pension De-Risking Case Study,” co-authored by Silverman, longevity bonds are defined as “capital market instruments that can reduce the upper tail of pension plan costs that are due to life expectancy significantly higher than initially expected.”

“Essentially, the corporation would issue a bond, with the principal repayment contingent on the level of future life expectancies,” the report said.

If plan sponsors had been using longevity swaps since 2000, they would have locked into an economic payment stream based on mortality exposure, but would have reduced their longevity exposure, and therefore “would have saved a significant amount of pension liability, because they would have not had that exposure over that period of time,” Silverman said.

When a plan sponsor is considering its options—whether to maintain its plan or to move in the direction of de-risking—it should consider not only the risks to the plan, but also the company’s risk tolerance, Silverman said.

For Milliman’s perspective on the de-risking of DB plans, click here.

Funded status improves in February from rise in interest rates and investments

March 9th, 2015 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. The funded status of the 100 largest corporate defined benefit pension plans increased by $80 billion during February, as measured by the Milliman 100 Pension Funding Index (PFI). After a $90 billion decrease in funded status in January, this month’s increase leaves these pensions’ funded status in approximately the same spot as they began the year.

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An increase in the corporate bond discount rates was a big driver of last month’s gains. But that needs to be put in perspective. January’s discount rate was the lowest in the history of our study, and February’s discount rate was the second-lowest. Discount rates continue to define pension funded status, and upward movement in those rates will be necessary to eliminate the funding deficit.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.13% by the end of 2015 and 4.73% by the end of 2016) and asset gains (11.4% annual returns), the funded ratio would climb to 94% by the end of 2015 and 107% by the end of 2016. Under a pessimistic forecast with similar interest rate and asset movements (3.13% discount rate at the end of 2015 and 2.53% by the end of 2016, with 3.4% annual returns), the funded ratio would decline to 77% by the end of 2015 and 70% by the end of 2016.

Milliman Hangout: Pension Funding Index, February 2015

February 11th, 2015 No comments

The funded status of the 100 largest corporate defined benefit pension plans dropped by $90 billion during January as measured by the Milliman 100 Pension Funding Index (PFI). The $90 billion funded status decline was the eighth largest monthly drop in the 15-year history of the Milliman 100 PFI. The funded status deficit ballooned from $292 billion to $382 billion since December 2014, which was due to a decline of 42 basis points in the benchmark corporate bond interest rates used to value pension liabilities. Pension assets had a monthly above-expected return that was due to strong fixed income asset return and this helped to counter liability losses. The funded ratio decreased from 83.5% to 79.6%.

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

Milliman 100 Pension Funding Index retreats to 79.6%

February 5th, 2015 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. The funded status of the 100 largest corporate defined benefit pension plans dropped by $90 billion during January, as measured by the Milliman 100 Pension Funding Index (PFI). The $90 billion funded status decline was the 8th largest monthly drop in the 15-year history of the Milliman 100 PFI. The funded status deficit ballooned to $382 billion from $292 billion at the end of December 2014, which was due to the decline of 42 basis points in the benchmark corporate bond interest rates used to value pension liabilities.

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The projected benefit obligation (PBO), or pension liabilities, increased to $1.876 trillion from $1.775 trillion at the end of December 2014. The change resulted from a decrease of 42 basis points in the monthly discount rate to 3.38% for January from 3.80% for December 2014. January’s discount rate is the lowest in the history of the Milliman 100 PFI. The last time we observed a comparable discount rate change was in July 2012 when discount rates fell 40 basis points ending at 3.92%. January’s precipitous drop is even more impactful.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.93% by the end of 2015 and 4.53% by the end of 2016) and asset gains (11.4% annual returns), the funded ratio would climb to 91% by the end of 2015 and 104% by the end of 2016. Under a pessimistic forecast with similar interest rate and asset movements (2.83% discount rate at the end of 2015 and 2.23% by the end of 2016 and 3.4% annual returns), the funded ratio would decline to 73% by the end of 2015 and 66% by the end of 2016.

Milliman Hangout: Pension Funding Index, January 2015

January 13th, 2015 No comments

The funded status for the 100 largest corporate defined benefit plans decreased by $22 billion during December 2014, according to the Milliman 100 Pension Funding Index (PFI). Historically low interest rates were the dominant factor in the $105 billion deficit increase during 2014. While higher than expected investment returns produced a solid $81 billion gain, pension liabilities increased by $186 billion. The funded ratio was 83.6% as of December 31, 2014, down compared with the ratio on December 31, 2013, of 88.3%.

For more perspective on January’s PFI, watch our latest Milliman Hangout featuring coauthor Zorast Wadia.

Corporate pension funding deficit grows by more than $100 billion in 2014 because of plummeting interest rates

January 7th, 2015 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 December, these plans experienced a $19 billion increase in pension liabilities and a $3 billion decrease in asset value, resulting in a $22 billion increase in the pension funded status deficit and a funded ratio of 83.6%. For the year, despite market returns of $81 billion, these pensions experienced a $105 billion increase in the pension funded status deficit, fueled by a $186 billion increase in liabilities as interest rates fell to a historic low at year end.

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What a difference a year makes. Last year at this time we were celebrating a historic rally for these pensions, thanks to—surprise surprise—cooperative interest rates. This year it’s the opposite story, with interest rates falling to 3.80%, the lowest rate we’ve ever seen in the 14-year history of this study. With rates this low, the liability increase for these pensions outstripped strong asset performance by more than $100 billion.

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 3.80% were maintained, funded status would improve, with the funded status deficit shrinking to $255 billion (85%.7 funded ratio) by the end of 2015 and to $217 billion (87.9% funded ratio) by the end of 2016. This forecast assumes 2014 aggregate contributions of $44 billion and 2015 and 2016 aggregate contributions of $31 billion.

Google Hangout: Pension Funding Index, December 2014

December 5th, 2014 No comments

The funded status of the 100 largest corporate defined benefit pension plans fell by $8 billion during November as measured by the Milliman 100 Pension Funding Index (PFI). The deficit widened from $263 billion to $271 billion, which was primarily due to another decrease in the benchmark corporate bond interest rates used to value pension liabilities. The funded ratio declined from 84.8% to 84.6% at the end of November.

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

Corporate pension funded status drops another $8 billion in November

December 4th, 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 November, these plans experienced a $26 billion increase in pension liabilities and an $18 billion increase in asset value, resulting in an $8 billion increase in the pension funded status deficit.

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The story this year seems to be the same month after month, and in November it’s exactly the same as it was in October—an $8 billion increase in the funded status deficit, with liabilities exceeding positive asset performance. For the year, interest rates have dropped by 79 basis points, driving a $167 billion liability increase.

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 3.89% were maintained, funded status would improve, with the funded status deficit shrinking to $230 billion (87% funded ratio) by the end of 2015 and to $191 billion (89.2% funded ratio) by the end of 2016. This forecast assumes 2014 aggregate contributions of $44 billion and 2015 and 2016 aggregate contributions of $31 billion.