Estimated cost of retiree pension risk transfer increases from 102.8% to 103.2% in August

Milliman today announced the latest results of its Milliman Pension Buyout Index (MPBI). As the Pension Risk Transfer (PRT) market continues to grow, it has become increasingly important to monitor the annuity market for plan sponsors that are considering transferring retiree pension obligations to an insurer. The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from insurers, to estimate the average cost of a PRT annuity de-risking strategy.

During August, the estimated cost to transfer retiree pension risk to an insurer increased by 40 basis points, from 102.8% of a plan’s total liabilities to 103.2% of those liabilities. This means the estimated retiree PRT cost for the month is now 3.2% more than those plans’ retiree accumulated benefit obligation (ABO). Accounting discount rates in August rose 24 basis points compared to a 20 basis point increase for annuity purchase rates, resulting in a slight rise in the relative cost of annuities.

The cost of pension risk transfer has begun to tick back up after July’s record-low rate of 102.8%. As interest rates rebound, and annuity purchase rates slowly follow suit, we will be watching closely to see if insurers keep up with the current climb in fixed income yields.

Plan sponsors should note that the MPBI is an average cost estimate, and individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape. Furthermore, specific characteristics in plan design or participant population can affect the cost of a pension risk transfer.

To view the complete Milliman Pension Buyout Index, click here.  

Workforce transition consideration for institutions of higher education

COVID-19 has been an inflection point for institutions of higher learning in the U.S. Midway through the 2020 semester, campuses shut down, refunded students’ room and board, and made unbudgeted investments in transitioning to a virtual environment.

For the 2021 academic year, most institutions are expecting declines in room and board payments, student enrollment, endowment returns, and alumni and donor giving. Public institutions are expecting lower state appropriation funding than they received in 2020. Alongside these projected revenue shortfalls, investments in social decisions need to continue to provide both distance and on campus education in the fall of 2021.

One of the ways institutions are responding to these financial challenges is to rethink their staffing models and reduce faculty and staff costs. Some are implementing hiring and travel freezes, deferred retirement contributions, salary reductions, furloughs, and freezing of annual merit increases. Some have gone further to eliminate staff positions and terminate faculty contract renewals, or change them to one-year contracts.

In this paper, Milliman’s Radhika Philip explains that workforce transitions need to be conducted with sensitivity and doing so can ultimately strengthen the institution’s reputation with its diverse stakeholders.

Corporate pensions improve by $93 billion in August, second-largest monthly increase in 20 years

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans.

In August, corporate pensions experienced the second-largest monthly funding increase in the past two decades, with a funded status improvement of $93 billion. In the 20-year history of the PFI, only July 2003’s monthly increase of $203.8 billion was higher. Discount rates for the month jumped 28 basis points, from 2.26% at the end of July to 2.54% as of August 31, lowering the Milliman 100 PFI deficit to $293 billion. These plans saw a monthly asset gain of 0.94%, which increased the PFI asset value by $11 billion. As of August 31, the funded ratio for these plans rose to 85.1%, up from 81.1% at the end of July, reversing declines experienced during the previous four months.

August was a great month for corporate pensions, as discount rates finally increased and the market value of assets improved as well – the fifth straight month of above-average investment returns. The fact that the funded status improved by a near-record-setting amount of $93 billion only serves to underline how the low-discount rate environment has been a drag on these pensions in 2020.

Looking forward, under an optimistic forecast with rising interest rates (reaching 2.74% by the end of 2020 and 3.34% by the end of 2021) and asset gains (10.5% annual returns), the funded ratio would climb to 90% by the end of 2020 and 105% by the end of 2021.  Under a pessimistic forecast (2.34% discount rate by the end of 2020 and 1.74% by the end of 2021 and 2.5% annual returns), the funded ratio would decline to 83% by the end of 2020 and 76% by the end of 2021.

To view the complete Pension Funding Index, click here. To see the 2020 Milliman Pension Funding Study, click here.

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

Milliman Adds Morningstar Advisor Managed Accounts to Retirement Administration Services

Milliman announced that it has added Morningstar advisor managed accounts to its retirement plan administration services. Advisor managed accounts allows a plan’s registered investment adviser (RIA) to create personalized investment portfolios for participants through Morningstar Investment Management LLC’s technology platform. Milliman has integrated the platform into its recordkeeping system using single-sign-on for a seamless participant experience and will brand it for the respective RIA firm.

We are pleased to be one of the first recordkeepers to add this new service offering. With advisor managed accounts, plan sponsors and participants gain access to personalized investment advice, while RIAs gain a broader platform to deliver individual service directly to participants. Our goal is to help participants achieve healthier financial outcomes, and this service adds another layer of support to help them do just that.

CAPTRUST Financial Advisors is one of the first RIAs to use the new platform, and is partnering with Milliman to introduce the new service to their joint clients. CAPTRUST has branded their version of advisor managed accounts as “Blueprint Managed Advice”.

“We’re excited to offer our managed account program, Blueprint Managed Advice, to our Milliman clients. Delivering personalized, one-on-one advice to participants is a core part of what we do at CAPTRUST and we look forward to working with Milliman to improve the retirement readiness and financial wellbeing of our shared participants,” said Jennifer Doss, Director and Defined Contribution Practice Leader, CAPTRUST.

“The beauty of advisor managed accounts is it was designed to allow RIAs to offer a managed accounts service across different recordkeepers with consistency and without the technology build out,” added Brock Johnson, President, Global Retirement & Workplace Solutions, Morningstar Investment Management LLC. “The addition of Milliman to our recordkeeping network is significant as it allows advisors to scale their retirement books of business across more plans— and in turn help more participants save for the retirement they want.”

Eurozone sovereign risk considerations for pension plans and other institutional investors

Government bonds are a key asset class for pension fund investment, allowing matching of long-term fixed liabilities. Sovereign risk, understood as the risk of default on government bonds, has historically been seen as low or zero in many developed economies. Government bonds have been perceived as “risk-free” instruments in part due to an implied capacity for countries to print more money should the ability to meet interest or maturity payments be called into question.

With the global financial crisis of 2008, and subsequent debt crisis in Europe, several eurozone economies have seen government bond yields rise well above what might be considered risk-free rates within the market. The implied sovereign risk reflects high levels of public debt in these countries together with the lack of any real room for manoeuvre given membership of the eurozone.

With COVID-19, the devastating effect on major economies of the pandemic is likely to mean that these governments are going to find it even harder to balance budgets. They may need to increase borrowing significantly, and the probability of sovereign default and/or possible exit from the eurozone can increase further.

What should pension plans and insurers with exposure to domestic sovereign risk within the eurozone consider? How might they manage the risk? In this article, Milliman’s Dominic Clark provides some insight and suggestions.

Redesigning retirement plans to align with business goals

A Milliman client sponsoring both a defined benefit (DB) plan and a defined contribution (DC) plan wanted to amend its overall retirement program but needed to navigate some potentially adverse accounting. Milliman professionals were enlisted to perform a comprehensive review of the current DB and DC plan designs as well as a number of alternative plan designs. In addition, our team needed to analyze the projected impact that each design would have on the client’s net accounting numbers to determine which design would best fit its overall business and retirement program goals. Milliman actuary Ryan Ellsworth discusses the solution used and its outcome in this case study.