Corporate pension funding plummets by $65 billion in May

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In May, these pensions experienced a $65 billion decrease in funded status, a precipitous drop that resulted from poor investment returns and a decrease in the benchmark corporate bond interest rates used to value pension liabilities. May saw a negative 0.74% investment return, resulting in a $15 billion decrease to the market value of assets for PFI plans. Discount rates also dropped in May, declining 24 basis points from 3.85% at the end of April to 3.61% as of May 31. Pension liabilities grew by $50 billion as a result. The funding ratio of the Milliman 100 PFI during May plummeted from 91.4% down to 87.9%.

May was a dismal month for corporate pensions, hitting plans with a double-whammy of poor equity returns and declining discount rates. In fact, May’s heavy losses bring pension funding lower than where it was at the start of 2019, and mark the third largest monthly funding decline in the past five years. Only January 2015 (at $97 billion) and December 2018 (at $70 billion) had worse outcomes.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.96% by the end of 2019 and 4.56% by the end of 2020) and asset gains (10.6% annual returns), the funded ratio would climb to 96% by the end of 2019 and 111% by the end of 2020.  Under a pessimistic forecast (3.26% discount rate at the end of 2019 and 2.66% by the end of 2020 and 2.6% annual returns), the funded ratio would decline to 84% by the end of 2019 and 77% by the end of 2020.

To view the complete Pension Funding Index, click here. To see the 2019 Milliman Pension Funding Study, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

Terminated and Insolvent Multiemployer Plans and Duties of Plan Sponsors Final Rule Explained

On May 2, the Pension Benefit Guaranty Corporation (PBGC) issued a final rule on Terminated and Insolvent Plans and Duties of Plan Sponsors. The final rule addresses reporting and disclosure requirements for plan sponsors of certain terminated and/or insolvent multiemployer pension plans.

The new rule is generally effective July 1, 2019, and covers withdrawal liability information and revised notice requirements for plans expected to be insolvent.

The PBGC issued the final rule to improve its monitoring of the agency’s obligations under the multiemployer insurance program while reducing the administrative burden for sponsors of some insolvent and/or terminated plans.

In this article, Milliman actuaries Yutaro Seki and Michael Sudduth summarize the information regarding the PBGC’s new rule.

Updated mortality tables proposed for pension plans

On May 22, the Society of Actuaries (SOA) released an exposure draft that includes new mortality tables that private-sector defined benefit pension plan sponsors and their actuaries consider in measuring retirement plan obligations. The proposed new tables, referred to as “Pri-2012” in the exposure draft, are generally designed to replace the tables known as “RP-2006.” The RP-2006 tables currently serve as the mortality basis for funding valuations and lump sum calculations, as well as for many companies’ accounting valuations.

The SOA indicates that most plan sponsors that update their mortality assumptions from the RP-2006 tables to the Pri-2012 tables “will experience only a small change in their pension liabilities, usually within plus or minus 1%.” The SOA also notes that the pension liability change will vary depending on a plan’s demographics and other assumptions (e.g., the discount rate) that are used to compute pension liabilities. According to the SOA, significant indicators of mortality are the participants’ “collar type”—white or blue—and income level, with the collar type being a stronger predictor of longevity than a plan’s benefit amount.

The total data set for the study included a substantial amount of multiemployer plan experience. However, the SOA found no significantly different mortality experience for participants in multiemployer versus single-employer plans, and thus did not produce separate Pri-2012 tables for multiemployer plans.

With regard to measuring retirement plan obligations under the Financial Accounting Standards Board’s accounting standards, employers that historically have chosen to use the most recent mortality tables published by the SOA will consider applying the Pri-2012 tables for measurement dates that occur after the SOA publishes the final version of the study, which is expected in the fall of 2019. At that time, the SOA also will likely and concurrently release an updated mortality improvement scale to succeed the currently used MP-2018 scale to estimate how mortality rates will change in the future.

Looking ahead, the IRS has already released the required mortality tables to measure pension obligations for 2020 funding valuations and to calculate lump sums for stability periods beginning in 2020. Therefore, the Pri-2012 tables will not be used for these purposes until at least 2021.

The SOA’s exposure draft can be found here. The deadline to submit comments on the exposure draft to the SOA is July 31, 2019. For additional information about the exposure draft or to assess the impact on your specific retirement plans, please contact your Milliman consultant.

Public pension assets rebound by 7.34% in Q1 2019, funding improves by $185 billion

Milliman today released the first quarter (Q1) 2019 results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q1 2019, these plans experienced a $185 billion jump in funding, largely due to stellar investment gains of 7.34% in aggregate. This improvement was the largest quarterly funding increase since the PPFI began in September 2016 and helped offset Q4 2018’s investment losses, which marked the PPFI’s largest quarterly decrease at $306 billion. Estimated investment returns for plans in the first three months of 2019 ranged from a low of 3.52% to a high of 11.57%. As a result, the funding ratio of the Milliman PPFI climbed from 67.2% at the end of December to 71.0% as of March 31, 2019.

The first quarter of 2019 was a welcome relief for public pensions after the dismal investment performance at the end of 2018. But even with the market fluctuations of the past six months, it’s important to bear in mind that these pensions have time horizons measured in decades. Plan sponsors should take this volatility as a reminder to review their asset smoothing policies, to ensure the short-term market fluctuations don’t translate into short-term contribution volatility.

As of March 31, 2019, the PPFI deficit stands at $1.508 trillion compared to $1.693 trillion at the end of December 2018. The total pension liability (TPL) continues to grow, and stood at an estimated $5.205 trillion at the end of Q1 2019, up from $5.164 trillion at the end of Q4 2018.  Funded ratios overall moved higher this quarter, with six plans moving above the 90% funded mark; there are now 14 plans above this mark compared to eight at the end of 2018.

To view the Milliman 100 Public Pension Funding Index, click here.

Also, to receive regular updates of Milliman’s pension funding analysis, contact us here.

Despite double-digit investment losses in 2018, nearly one-third of multiemployer plans over 90% funded, but least-funded plans show little hope of recovery without help

Milliman today released the results of its Spring 2019 Multiemployer Pension Funding Study (MPFS), which analyzes the funded status of all multiemployer pension plans in the United States. Between June 30, 2018, and December 31, 2018, the aggregate funded ratio of multiemployer plans dropped from 81% to 74% largely due to poor investment returns. In 2018, estimated average returns for MPFS plans were approximately -5% (compared to investment return assumptions of 6% to 8%), resulting in asset losses ranging from 11% to 13% below expectations. The overall funding shortfall for these plans increased by $51 billion during the last six months of 2018.

But despite the double-digit losses, the study found that, as of December 31, 2018, the majority of U.S. multiemployer plans are much healthier than they were at the market’s low point in March 2009. The MPFS includes 1,251 plans covering 10.5 million participants; nearly one-third—or 383 plans—are at least 90% funded and another 288 plans are funded between 80% and 90%. However, there are at least 123 “critical and declining” plans covering roughly 1.3 million participants that are likely headed for insolvency absent Congressional action.

Despite 2018’s investment losses, it appears that the majority of multiemployer plans are positioned to absorb that experience and improve in the future. However, for about 10% of plans, even stellar asset performance is unlikely to right the ship. Most of these plans will need outside help from lawmakers or others in order to prevent insolvency.

To view the complete study, click here.

Also, to receive regular updates of Milliman’s pension funding analysis, contact us here.

Milliman FRM Insight: April 2019 Market Commentary

April marked the best risk-adjusted monthly return for global equities since October 2015. Up for its fourth consecutive month, the global equity market, as measured by the S&P Global 1200, locked in its best April year-to-date (YTD) return on record. Equity market volatility in April declined sharply from average levels in March down to near its five-year low. Tightening credit spreads were offset by rising yields in April, leaving the investment grade bond market flat for the month. The price of oil climbed 6.8%, marking its fourth consecutive month of increases and bringing its YTD increase to 35%.

Milliman’s Joe Becker offers more perspective in this month’s market commentary. Download the full commentary at