Public pension assets plummet in 2018 Q4, experiencing largest quarterly losses in two years

Milliman today released the 2018 fourth quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In 2018 Q4, these plans experienced a $306 billion loss in funding, largely due to a disappointing quarterly investment return of -6.39% in aggregate. This marks the largest quarterly funding decrease since the PPFI began in September 2016. Estimated investment returns for plans in Q4 ranged from a low of -10.27% to a high of -2.18%. As a result, the funding ratio of the Milliman PPFI dropped from 72.9% at the end of September to 67.2% as of December 31.

Public pensions took a huge hit in the fourth quarter of 2018. And for those plans in which benefits paid out exceed contributions coming in, this is especially difficult news, as investment returns are critical to slow the outflow of funding.

As of December 31, 2018, the PPFI deficit stands at $1.693 trillion, compared to $1.387 trillion at the end of September 2018. The total pension liability (TPL) continues to grow, and stood at an estimated $5.164 trillion at the end of Q4, up from $5.123 trillion at the end of Q3. Funded ratios overall moved lower this quarter, with nine plans dropping below the 90% funded mark; there are now just eight plans above this mark, compared to 17 at the end of Q3.

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

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

How are defined benefit plans in the UK affecting southern European companies?

Private sector defined benefit (DB) pension plans are uncommon in Spain and Italy. However, DB plans remain an important issue for companies in the United Kingdom. They can have a significant effect on the financial performance of multinational companies.

MBW International, Milliman’s joint venture with Barnett Waddingham, recently analysed 20 multinational companies in Spain and Italy with around £51.7 billion of UK DB pension liabilities between them. The analysis by Isabel Coles and Andrew Vaughan considers the effect UK DB pensions are having on the companies that make up the Spanish IBEX 35 and Italian FTSE MIB indices. The authors look at how funding levels have changed and consider developments in three important areas: assets and investment risk, benefit payments and cash contributions. They also discuss how these companies are addressing the challenges posed by their pension obligations.

To download the report, click here.

Milliman FRM Insight: January 2019 Market Commentary

Stocks hit the ground running in 2019 with strong earnings and positive Fed guidance. The rally that began in the final days of 2018 extended through January, pushing the global equity market to its highest calendar-month return in more than seven years. A declining dollar propelled international stocks higher, with both developed and emerging market equities making significant gains. All market sectors were higher in January, with industrials and energy at the front of the pack. Strong earnings reports were another catalyst pushing stocks higher. As markets climbed higher, volatility ebbed lower.

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

Regulatory roundup

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

Proposed methods for computing withdrawal liability rule issued
The Pension Benefit Guaranty Corporation (PBGC) will publish a proposed rule that would implement statutory changes under the Multiemployer Pension Reform Act of 2014. The rule would affect the determination of a withdrawing employer’s liability under a multiemployer plan and annual withdrawal liability payment amount.

The proposed rule would provide simplified methods for determining withdrawal liability and annual payment amounts that a plan sponsor would be able to adopt to satisfy the statutory requirements that certain amounts associated with funding improvement/rehabilitation plans and benefit suspensions be disregarded.

To read the entire proposed rule, click here.

New GAO report on promote better retirement security
The U.S. retirement system has fundamentally changed since the 1970s, and several challenges have emerged, including:

• Baby boomers reaching retirement age, affecting Social Security’s finances
• Complexity of planning and managing funds in employer-sponsored retirement plans
• Growing debt and health care costs hindering individual savings

These challenges increase the risk that people will outlive their retirement savings and put added pressure on government programs. The Government Accountability Office’s report “A Comprehensive Re-evaluation Needed to Better Promote Future Retirement Security” examines (1) the fiscal risks and other challenges facing the U.S. retirement system, and (2) the need to re-evaluate our nation’s approach to financing retirement.

To read the report, click here.

Corporate pensions’ funding status boosted by January investment gains, funding ratio at 91%

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In January, these pensions experienced a $19 billion increase in funded status thanks to healthy investment gains. In fact, January’s asset return of 3.35% was greater than any prior monthly asset return in 2018. The funding ratio for the Milliman 100 PFI plans rose from 89.7% at the end of December to 91.0% as of January 31, and the funding status deficit narrowed from $167 billion to $148 billion during the same time period.

“Despite the market turbulence over the past few months, corporate pension funding is back to the same level it was in January 2018,” said Zorast Wadia, co-author of the Milliman 100 PFI. “It feels like déjà vu: just like in 2018, the year is off to a great start, with strong asset performance and discount rates above 4%. If both hold we’ll be heading in the direction of full funding, but as history has shown, any uncertainty or market volatility could make this year another bumpy ride.”

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.61% by the end of 2019 and 5.21% 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 121% by the end of 2020. Under a pessimistic forecast (3.51% discount rate at the end of 2019 and 2.91% by the end of 2020 and 2.8% annual returns), the funded ratio would decline to 85% by the end of 2019 and 79% 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.

Expiring smoothing provisions may require cash calls to fund pensions beginning in 2021

The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the pension smoothing provisions provided in the Moving Ahead for Progress in the 21st Century (MAP-21) Act to the 2020 plan year. Absent another law to further extend the pension smoothing provisions, we expect plan funding targets to increase at greater speed than the levels experienced in recent years beginning in the 2021 plan year. This projected increase in funding target liability, absent an offsetting increase in plan assets, is likely to deteriorate a plan’s funded status. As a result, we expect corresponding increases in otherwise required minimum funding contributions. Even plans that have experienced funding holidays for the last several years could see a cash contribution required in the 2021 plan year.

There are several ways to plan now to mitigate large increases in cash contribution requirements beginning in 2021. The first way is to start making level funding contributions prospective from the 2018 plan year. Ideally, if a plan can fund the expected funding shortfall before the 2024 plan year, the year when the segment rate relief corridor fully expires, then minimum required contributions for future years would just be the plan’s target normal cost (assuming future expected asset returns are achieved). However, there is a risk of funding more than necessary. If overall actual asset performance is better than expected and corporate bond rates rise higher than expected, a plan that is well funded now is more likely to become fully funded before the 2024 plan year and may find itself having already made more contributions than necessary. However, the funding ratio will still be better than simply funding the minimum required contribution.

Another way to avoid minimum required contributions is to voluntarily reduce funding balances to eliminate funding shortfalls. Another consideration would be to decrease liability exposure by purchasing annuities or having lump-sum window offerings.

If no action is taken until 2021, plan sponsors should expect hefty increases in minimum funding requirements.