Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest corporate defined benefit pension plans. In April, these pension plans experienced a $37 billion decrease in funded status based on a $60 billion increase in the pension benefit obligation (PBO) and a $23 billion increase in assets.

We knew that the funded status improvement that has characterized these 100 pension plans so far in 2013 couldn’t last forever. We saw a $106 billion improvement during the first quarter of 2013, thanks to strong investment performance and cooperative interest rates. The strong investment performance continued through April, but interest rates were less cooperative, dropping below 4% for the first time this year and driving a $60 billion increase in the pension benefit obligation.

In April, the discount rate used to calculate pension liabilities decreased from 4.22% to 3.98%, increasing the PBO from $1.651 trillion to $1.711 trillion at the end of the month. The overall asset value for these 100 pension plans increased from $1.367 trillion to $1.390 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.5% median asset return and if the current discount rate of 3.98% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 81.2% to 84.2% by the end of 2013 and to 89.3% by the end of 2014.

Milliman also hosted a live broadcast on Google+, with Zorast Wadia discussing the latest Pension Funding Index.

Milliman today released the results of its latest Pension Funding Index (PFI), which consists of 100 of the nation’s largest corporate defined benefit pension plans. In March, these pensions experienced a $29 billion increase in funded status based on a $14 billion decrease in the pension benefit obligation (PBO) and a $15 billion increase in assets. The March improvement of $29 billion results in a cumulative improvement of $106 billion in the first quarter of 2013. Note that this latest PFI reflects the data from the annual update of the Milliman 100 companies’ 2012 financial figures included in Milliman’s 2013 Pension Funding Study, published on March 25.

We’ve followed a record deficit at the end of 2012 with a record first quarter to open 2013. The funded ratio has gone from 77% at the end of last year to just under 83% at the end of the first quarter, which is about as strong of a rally as we could hope for in this persistent low-interest-rate environment.

In March, the discount rate used to calculate pension liabilities increased from 4.16% to 4.22%, decreasing the PBO from $1.665 trillion to $1.651 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.351 trillion to $1.366 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.5% median asset return and if the current discount rate of 4.22% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 82.7% to 86.1% by the end of 2013 and to 91.3% by the end of 2014.

The Moving Ahead for Progress in the 21st Century Act (MAP-21) is intended to provide defined benefit sponsors temporary contribution funding relief. Due to low interest rates the past few years, assets have been unable to keep pace with rising liabilities without the need for higher sponsor contributions. MAP-21 eases contribution requirements by allowing the interest rates used to determine minimum required plan contributions to be based upon a 25-year average, subject to an interest rate corridor, instead of a two-year average.

The question arising from this provision of funding relief is what actions can plan sponsors take to de-risk their pensions? In Actuarial Digest’s spring 2013 issue, Zorast Wadia provides perspective on several de-risking options sponsors may be considering. Here is an excerpt:

Given the high sensitivity of plan liabilities to interest rate movements, some plan sponsors have focused on the asset side of the balance sheet. Many asset- liability studies have been conducted since the inception of the Pension Protection Act of 2006. A fairly common outcome is recommendations to plan sponsors to move more investments toward fixed income and away from equity classes. While this measure is driven by risk reduction, it is also flawed in that it serves to lock in a plan’s funded status. If a plan is underfunded, a shift toward fixed income essentially means that the plan sponsor must make even larger plan contributions.

Some plan sponsors are considering cash-borrowing strategies to fully fund their pension plans and then move into all fixed income investments. Borrowing strategies during a low interest rate environment may have their appeal, but it essentially comes down to how a company views its corporate debt versus its pension debt. Companies have to go through this internal accounting exercise before deciding whether it makes sense to borrow cash to fully fund their plans. It is also important to note that full funding in this sense really means on a pre-MAP-21 basis. Then only will a plan no longer have to pay variable rate PBGC premiums, which would amount to a cost savings. Also, once fully funded, it is important to lock in that fully funded status. That is where a liability-driven investment strategy comes into play; an asset strategy that is designed to mimic liability movements. The downside to this strategy, besides the borrowing costs, is that plan sponsors are taking themselves out of the market. Should interest rates rise, plan sponsors will miss out on the improvements in funded status and the associated lower required costs to fund their plans. Let’s not forget one of the original appeals of a defined benefit plan: the possibility for investment earnings to lower sponsor benefit costs.

Another de-risking move that has gained some momentum since MAP-21 passed involves extending lump sum distribution offers to terminated vested participants. This move is motivated by the potential to reduce the size of the pension plan. A smaller plan will be subject to lower PBGC premiums and less subject to longevity risk associated with the participants who are no longer in the plan. It is also motivated by the current declining interest rate environment. The interest rate basis used to determine lump sum options is generally known prior to the plan year in which the distributions occur. After observing how interest rates were falling throughout most of 2012, many plan sponsors decided to offer participants lump sum windows (essentially a limited one-time take it or leave it opportunity) during the final quarter of 2012. The 2012 lump sum payouts would be based on higher 2011 interest rates and thus be lower than they would have been had the lump sum payout occurred in the following year.

To read the entire article, click here.

Longevity plans could one day address some of the financial uncertainty associated with longer life spans. The concept is designed to offer retirees a supplemental defined benefit (DB) pension (i.e., a longevity plan) alongside their defined contribution (DC) plan.

This article in Retirement Income Journal (subscription required) highlights the Milliman paper “Longevity Plan,” explaining how such a plan may reduce longevity tail risk while providing retirees sustainable income past 80 years old. Here is an excerpt from the paper outlining the plan’s features:

In order for the DB plan to be viable in its role as a supplementary retirement vehicle, its structure will have to be different from that of the traditional DB plan with which many are already familiar. The DB plan that is being proposed here is essentially a longevity plan. Key features of the proposed longevity plan include:

• Unit-accrual pattern such as in a career-average plan or a plan based on flat dollars per years of service
• Simplistic retirement options: No ancillary death, disability, or early retirement benefits would be offered (other than perhaps a lump-sum death benefit between termination and the pension actually starting)
• Life annuity options only: A single-life option for single participants and 75% joint and survivor option for married participants
• Participants would not begin plan participation before age 45 (although this could be extended to age 50)
• Participants would not commence benefits earlier than age 75 (and this could be extended to age 80 or 85)

Presently, ERISA prohibits employers from postponing pension payouts later than age 65 generally. Bill Most and paper co-author Zorast Wadia were quoted by Retirement Income Journal discussing the rule.

Here’s an excerpt from the article:

This “unit-accrual design” is still just a concept, not a product. But the authors of the paper think the only thing that prevents it from widespread adoption is an outdated ERISA regulation against delaying pension payouts past age 65.

“Everyone’s talking about this and lots of new products has been proposed,” said Bill Most, a Milliman principal who worked on the paper with principals Zorast Wadia and Daniel Theodore and consulting actuary Danny Quant.

“But we don’t need new products, we need changes from government. And the results will hopefully give us something that employers might embrace. We’re not kidding ourselves. We don’t deny that there’s a lot of bad faith toward defined benefit plans. But from a cost perspective, this makes sense.”

…“They’ve relaxed certain rules related to required minimum distributions starting at age 70½, but they have not made changes in the terms of defined benefit plans,” said Zorast Wadia. “If you’re no longer working, you must begin payments from a defined benefit plan no later than age 65. If you’re still working past age 65, they won’t force you to take benefits. But ERISA won’t let the company purposely delay payments beyond 65 if you’re retired.”

For more perspective on longevity plans, click here.

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In February, these pensions experienced a $6 billion decrease in funded status based on a $17 billion increase in the pension benefit obligation (PBO) and an $11 billion increase in assets. February’s growth in the funded status deficit follows a near-record improvement of $107 billion in January and still leaves these pensions in better shape than at the end of 2012.

Assets continued to climb in February, but as usual it was interest rates that ultimately drove pension funded status. Thanks to cooperative interest rates in January, we are still ahead for the year. Even with the Dow hitting new record highs, it will ultimately be interest rates that dictate the pension funding story in 2013.

In February, the discount rate used to calculate pension liabilities decreased from 4.45% to 4.40%, increasing the PBO from $1.666 trillion to $1.683 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.361 trillion to $1.372 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.8% median asset return and if the current discount rate of 4.40% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 81.5% to 85.6% by the end of 2013 and to 90.6% by the end of 2014.

These figures are tentative and will be revisited as part of the 2013 Milliman Pension Funding Study, to be released later this month. Milliman expects that de-risking activities made by some of these companies will probably lower asset and liability figures, which may slightly negatively affect the plans’ overall funded status.

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In January, these pensions experienced a $106 billion improvement in funded status based on an $83 billion decrease in the pension benefit obligation (PBO) and a $23 billion increase in assets. The $106 billion advancement in January completely reverses a $74 billion deficit increase over the course of 2012 and sets off these 100 plans on a strong start in 2013.

In January we saw one of the more cooperative interest rate environments in recent memory. Over the course of 2012, plunging interest rates drove a ballooning pension funded status deficit. Now these rates have helped deflate that deficit. It’s early, but $106 billion in improvement is welcome news.

In January, the discount rate used to calculate pension liabilities increased from 4.18% to 4.45%, decreasing the PBO from $1.748 trillion to $1.665 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.337 trillion to $1.360 trillion.

Looking forward, if these 100 pension plans were to achieve their expected 7.8% median asset return and if the current discount rate of 4.45% were to be maintained throughout 2013 and 2014, their pension funded ratio would improve from 81.7% to 86.1% by the end of 2013 and to 91.1% by the end of 2014.

These figures are tentative and will be revisited as part of the 2013 Milliman Pension Funding Study, to be completed in March. Milliman expects that de-risking activities made by some of these companies will probably lower asset and liability figures, which may slightly negatively affect the plans’ overall funded status.

Defined benefit pension plans in the United States had a historic year in 2012. Interest rates continued to decline in 2012, much as they did for the past three years. The lower interest rates generally resulted in escalating liabilities and deteriorations in pension plan funded status. Assets generally performed above expectations, but still could not keep pace with rapidly rising liabilities.

The Moving Ahead for Progress in the 21st Century Act (MAP-21) provided some relief from the IRS funding rules (but not SEC/FAS accounting rules) for single employer pension plans. MAP-21 was signed into law on July 7, 2012, and had an immediate impact on most pension plans by providing interest rate relief. During the second half of the year, the anticipated future effects of MAP-21 also led to renewed talks about reducing risk in pension plans. De-risking initiatives also had plan sponsors strategizing with their plan’s investment committees.

In this article, Zorast Wadia reviews the major factors affecting defined benefit pension plans in 2012 and how those concerns may carry over into 2013.

This article was originally published in the Actuarial Digest.

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In November, these pensions experienced a $33 billion increase in funded status based on a $28 billion decrease in the pension benefit obligation (PBO) and a $5 billion increase in assets. The $33 billion increase begins to chip away at near-record funded status deficits that have persisted throughout the last two quarters. The deficit at the end of November sat at $466 billion.

The interest rates that determine pension funding liabilities climbed back above 4% in November, a welcome development for plan sponsors. If you need an illustration of how substantially interest rates are moving funded status, consider that through November these pensions have exceeded their expected annual return. If they hold onto these gains through December it will be the third such year out of the last four. And yet we’re still dealing with near-record deficits. It’s all about rates, and calendar-year-end funded status will depend largely on where the discount rate ends up as of December 31. 

In November, the discount rate used to calculate pension liabilities increased from 3.96% to 4.05%, decreasing the PBO to $1.793 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.322 trillion to $1.327 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.05% were to be maintained throughout 2013 and 2014, these pensions would improve the pension funded ratio from 74.0% to 78.7% by the end of 2013 and to 83.3% by the end of 2014.

Living to 100 years old is considered by many to be a record benchmark. But a recent article by Matthew Sparks in the Telegraph, “Pension firms preparing for customers to live to 125,” reminded us that, for insurers, the age of 100 is where things start to get interesting. That is because life expectancies have steadily increased over the past few decades and, projecting ahead, people living to over 100 years old will soon be the norm. After all, based on projected mortality table assumptions, the probability of a 65 year old living to at least age 90 is 38% while the probability of a 65 year old living to at least age 100 is 5%. Either of those probabilities coming to fruition could have some nontrivial financial implications for retirement plan sponsors and insurance companies. Insurers taking on the obligations of providing life annuities need to account for the possibility of people living well beyond their average life expectancies. In fact, it’s not uncommon for many pension models and retirement savings products to be valued under the assumption that its users could live to be up to 125 years old.

The increased longevity could of course turn out to be both a blessing and a curse for retirees. It’s a blessing if one is able to spend more time with one’s family while still being able to live comfortably and draw from one’s savings. On the other hand, not being able to afford necessary healthcare services or not having adequate retirement income could make longevity a living nightmare.

What has been observed so far is that living beyond one’s average life expectancy can be costly and problematic. What is needed is a way to address this longevity risk. One possible solution is the creation and acceptance of a longevity plan. This is a setup where one’s personal savings and accumulations from a defined contribution (DC) plan is meant to carry you through the initial retirement years leading up to average life expectancy. Then, a longevity defined benefit (DB) plan would commence at the later stages of retirement and continue for the rest of one’s remaining lifetime. The allowance for a later commencement age would help keep the costs of this product down.

The concept of longevity plans is expected to get increased attention as Baby Boomers begin their retirements. Hopefully, legislative action can occur soon to legalize and promote longevity plans so that we can avoid a retirement crisis in the future. To read more about longevity plans, please see the article “Longevity risk and retirement,” available here.

Longevity poses a challenge for retirees with defined contribution plans, because there is always risk of someone outliving his or her savings. A new application for defined benefit plans as a supplement to defined contribution plans may help provide longevity protection.

In his new article on MoneyManagementIntelligence.com, Zorast Wadia outlines this approach, known as a “longevity plan.” Here’s an excerpt explaining how such a retirement model would work:

“In order for the longevity plan concept to succeed, it will need to provide annuity protection to plan participants, be relatively easy to understand and administer and be affordable to plan sponsors. To accomplish the goals of longevity protection and cost reduction, some changes will be necessary to current pension laws including allowing employers to limit plan participation to later ages (e.g. age 45 and beyond) and defer benefit commencement to later ages (e.g. age 75 and beyond). To allow for ease of administration while still offering longevity protection, forms of payment would need to be limited to life and joint and survivor annuity options. The longevity plan would also eliminate investment risk since annuitants would receive guaranteed employer-funded benefits from the longevity DB plan. With the longevity DB plan in place, participants would be free to adjust their investment strategy with respect to benefits accruing from their DC plans. Participants with a higher risk tolerance could invest more aggressively with respect to their individual savings accounts.”

For more on this concept, check out another article by Wadia, “Longevity Risk & Retirement,” which first appeared in the spring 2012 issue of the Actuarial Digest.

Previous Milliman Insight articles have also assessed longevity plans. “Saving for retirement: What can employers do?” discusses how a “layered longevity plan can potentially ensure that people do not outlive their retirement balances for an uncertain duration.”

For more perspectives on longevity risk and retirement planning read our four-part retirement landscape series, where our team of Milliman consultants accesses the array of risks facing retirees and plan sponsors, and provides feasible solutions to them.