Using asset liability modeling to re-risk defined benefit plan

A financial services company emerging from a divestiture sought Milliman’s assistance with the subsequent re-risking of its defined benefit pension plan’s investment portfolio. The plan sponsor wanted to explore investment options that would best allow it to meet its future contribution requirements while limiting the risk of being underfunded on either an accounting or PBGC basis. The plan sponsor also wanted to understand the impact on accounting expense and balance sheet volatility as a result of investment allocation changes where the employer would take on more equity exposure.

Milliman consultants performed an asset liability modeling (ALM) study to review the company’s investment policy statement, understand its risk tolerance, set achievable financial goals, and present projections of assets and liabilities. The goal of the ALM study was to estimate expected levels, trends, and possible variability over the next 10 years of the plan’s annual required contributions, funded status, and accounting expense under the current policy asset allocation and several alternative asset allocations based on the client’s input.

To learn more about this endeavor, read Zorast Wadia’s case study “Assisting a plan sponsor with its investment portfolio using asset liability modeling.”

Milliman FRM Market Commentary: December 2018

For the U.S. equity market, December 2018 statistics are reminiscent of the great financial crisis. For the S&P 500, the month of December was its worst in several years and across several dimensions. The index wrapped up 2018 with its highest monthly volatility since August 2011 and its worst monthly return since February 2009. Not a single sector offered a positive return for the month. Interest rate sensitive utilities generated the smallest loss while energy stocks, weighed down by falling oil prices, were the biggest losers.

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

Investment losses and stagnant discount rates in Q4 derail stellar year for corporate pensions, but overall funding still improves for 2018

Milliman today released the year-end results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In 2018, corporate pension funding ended higher for the year, with the funding ratio climbing from 87.6% at the end of 2017 to 89.9% as of December 31, 2018. While plan assets declined by $93 billion for the year due to poor asset performance, plan liabilities also fell thanks to a discount rate increase of 66 basis points. In aggregate these plans experienced a $56 billion improvement in funded status for the year.

Assets underperformed expectations in 2018, with a cumulative investment loss of 2.77% (by comparison, the 2018 Pension Funding Study reported that the monthly median expected investment return was 0.55%, or 6.8% annualized). In December, the Milliman 100 PFI experienced its worst funding month of the year, with a $68 billion drop in funded status that resulted from 1.49% investment losses and a decline in the corporate bond interest rates that are used to value pension liabilities. As such, December 2018 ended with a funded ratio just under 90%, despite the PFI posting funded ratios above 90% for each of the 11 preceding months of the year.

The fourth quarter’s asset losses and stagnant discount rates derailed what had started out as an optimistic year for corporate pensions. Looking ahead to 2019, with those asset losses and in spite of the discount rate improvement we’re likely to see pension expense increase in the coming year. Milliman’s upcoming 2019 Pension Funding Study will provide more specific details around what’s expected.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.79% by the end of 2019 and 5.39% by the end of 2020) and asset gains (10.8% annual returns), the funded ratio would climb to 104% by the end of 2019 and 120% by the end of 2020. Under a pessimistic forecast (3.59% discount rate at the end of 2019 and 2.99% by the end of 2020 and 2.8% annual returns), the funded ratio would decline to 83% by the end of 2019 and 77% by the end of 2020.

To view the complete Pension Funding Index, click here. To see the 2018 Milliman Pension Funding Study, click here.

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

Employers and employees – sharing the risks of retirement

Over the past 40 years, the primary retirement plan offered by most employers has transitioned from traditional defined benefit (DB) plans to defined contribution (DC) plans. While these retirement plan designs offer important benefits to employers, the shift has created some negative consequences that are becoming evident as the first generation of DC-only participants begin to retire.

A hybrid retirement plan incorporating design features of traditional DB plans and DC plans may provide the best results for both employers and employees. In this article, Milliman consultants discuss how and why the first generation of DC-only retirees is struggling. They also explain how a hybrid retirement plan like the Milliman Sustainable Income Plan® (SIP) helps employers and employees share retirement risks in a more rational way.

Regulatory roundup

More retirement-related regulatory news for plan sponsors, including links to detailed information.

IRS updates revenue procedures for 2019
The Internal Revenue Service published Internal Revenue Bulletin 2019-1, which includes the various revenue procedures, revised for 2019, for issuing letters, rulings, determination letters, and technical advice on specific issues related to employee benefits.

• Rev. Proc. 2019-1: Letter rulings, information letters, and determination letters—the schedule of user fees for letter rulings is included in Appendix A and reveals that for certain requests for letter rulings.
• Rev. Proc. 2019-2: Explains when and how technical advice is furnished by the various Associate Chief Counsels and Division Counsel/Associate Chief Counsel to a director or an area director, appeals.
• Rev. Proc. 2019-3: Provides a revised list of tax code provisions under the jurisdiction of the various Associate Chief Counsels and the Division/Counsel/Associate Chief Counsel on which the IRS will not issue rulings or determination letters.
• Rev. Proc. 2019-4: Provides procedures for furnishing ruling letters, information letters, etc. on matters related to tax code sections currently under the jurisdiction of the Commissioner, TE and GE Division.

For an electronic version of Internal Revenue Bulletin 2019-1 which contains these revenue procedures and user fee schedules, click here.

PBGC annual report of the participant and plan sponsor advocate
The Pension Benefit Guaranty Corporation (PBGC) released the 2018 Annual Report of the Participant and Plan Sponsor Advocate. This statutorily required report discusses the activities of the Office of the PBGC Participant and Plan Sponsor Advocate.

Notably, the report provides the second part of its study on single employer pension plan de-risking. Unlike the quantitative approach of the first part of the de-risking study, Part II took a qualitative approach, which consisted of a focus group from a small but diverse group of plan sponsors on varying paths toward de-risking. The small group format allowed for a deeper probe into the reasoning behind de-risking decisions, which can be helpful to inform and shape retirement policy for all Americans. The report also offers numerous recommendations for multiemployer plans.

To download the entire report, click here.

GASB implementation guide exposure draft on fiduciary activities
The Governmental Accounting Standards Board (GASB) has issued a proposed Implementation Guide that contains question and answers about the GASB’s new standards on accounting and financial reporting for fiduciary activities. The exposure draft proposes answers to dozens of questions about GASB Statement No. 84, Fiduciary Activities.

For more information, click here.

Notice providing interim guidance on excess remuneration and parachute payments
The IRS released Notice 2019- 09, which provides interim guidance on the provisions of the new § 4960 added by the Tax Cuts and Jobs Act, and announces the intent of Treasury and the IRS to issue proposed regulations. Section 4960 provides that excess remuneration and excess parachute payments paid by an applicable tax-exempt organization to a covered employee are subject to an excise tax (currently 21 percent). This notice provides interim guidance defining (1) “applicable tax-exempt organization,” (2) “excess remuneration,” (3) “covered employee,” and (4) “excess parachute payment.” In addition, the notice instructs taxpayers on how to report and pay the excise tax.

For more information, click here.

Administrating voluntary pension terminations

In preparation of a voluntary pension termination, one plan sponsor offered all terminated, vested, and active participants the option to take a full lump-sum payout of their pension benefits regardless of age.

Voluntary pension plan terminations can present sponsors with several challenges. A team of actuaries and plan administration professionals can work closely with the plan sponsor to effectively manage, organize, and track the termination from start to finish. Learn how Milliman helped one client administer a plan termination in this case study by Verna Brenner.