Milliman FRM Insight: September 2019 Market Commentary

Global equities notched their worst month of the summer amidst heightened volatility. After touching the all-time high on July 26, the selloff that began in the last week of July accelerated into August, pushing the S&P 500 lower for six consecutive days by a total of 6%. For the entirety of the month the S&P vacilated in a 3% range, rising and falling with each new piece of trade-related news. Equities outside the U.S. offered no haven as both developed and emerging markets declined, exacerbated by a strengthening U.S. dollar. The volatility of the S&P 500 began the month below the 18% volatility threshold of the S&P Managed Risk Index, but quickly moved above it in early August. The price of oil fell for the third straight month as prospects of limited demand were met with growing supply.

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

Exploring funded status volatility of defined benefit plans

The funded status of corporate defined benefit (DB) pension plans has experienced unprecedented volatility in the 21st century.  Numerous pension de-risking techniques are available for plan sponsors to use depending on their risk exposure and risk tolerance. Risk management, by definition, can be a risky business.

When Milliman established the Pension Funding Index in 1999, DB plans were generally in surplus positions. This observed surplus continued through the end of 2001. However, the Milliman 100 pension plans recorded a funded status deficit of $16 billion by early 2002 in the wake of the dot-com crash and the Sept. 11 terrorist attacks.

The ensuing period of deficit lasted until 2006 with the funded status deficit reaching $36 billion. An all too brief economic and funded-status recovery followed with the funded status surplus reaching $3 billion in 2008. This period of surplus was short-lived as the Milliman 100 plans began their second distinct period of deficit positions in 2008, during the time of the worldwide global financial crisis, with the funded status deficit starting out at $7 billion. Those deficits have continued through the recession and beyond, exceeding a decade. This leads us to the current funded status deficit of $212 billion as of June 2019.

This article by Milliman consultant Zorast Wadia examines the sources of funded status volatility seen over the past two decades and discusses how plan sponsors of DB pension plans have adapted. It also covers the pros and cons of several popular de-risking mechanisms.

How are cash flows and current day value used to calculate the duration of actuarial liabilities?

Actuaries calculate retirement plan liabilities by taking a stream of benefit payments, or cash flows, expected to be received from a plan and assigning a measure of current day value to each payment in the stream, expressed as a single cash amount as of a valuation date. Current day value is the concept that money available today has the potential to earn interest. When describing a sum of money to be provided in the future, its value today should be less in order to account for earnings potential. It is the sum of all expected payments, measured at current day value, which defines an actuarial liability. This article by Milliman actuary Reid Earnhardt explains how cash flows and present value are used to calculate the duration of actuarial liabilities.

How can employers design benefits packages that attract and retain employees?

While employees across all generations might share common goals and challenges, priorities will vary depending on where they are in their lives and careers. For example, research shows the goal of aligning employer and employee values is particularly important to Millennials.

In today’s tight labor market, companies need to look beyond salary in order to attract and retain employees. Companies must also understand what employees really want from their jobs and be purposeful and creative with the benefits packages they offer. Designing such comprehensive, competitive benefits packages means looking beyond the old standards—health insurance, retirement, paid time off—and embracing forward-thinking options like non-traditional and voluntary benefits, and improvements to a company’s work environment and culture.

As with financial security, flexibility is also an important goal for everyone. How that looks could vary significantly, from telecommuting and remote work to phased retirement options. Employers who take into account such differences in priorities are more likely to create an inclusive benefits environment that meets the needs of all their employees.

To read more about what companies can do to attract and retain employees, read this paper by Ellen Harrington and Valerie Verrecchio.

August’s discount rate hits PFI record-low as corporate pension funding drops by $87 billion

Milliman, Inc., a premier global consulting and actuarial firm, today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In August, the PFI monthly discount rate dropped by 42 basis points to 2.95%, the lowest ever recorded in the 19-year history of the index. Until August, the Milliman 100 PFI had never reported a discount rate below 3.00%.

As a result, the funded status deficit ballooned from $219 billion at the end of July to $306 billion as of August 31, an $87 billion funding decrease for these plans. The projected benefit obligation (PBO) increased by a whopping $104 billion, though it was partially offset by $17 billion in investment gains for the month. During August, the funded ratio of the Milliman 100 PFI fell from 87.7% to 83.8%.

Discount rates have fallen by 110 basis points over the past twelve months, slashing corporate pension funding and hitting an all-time low for the PFI. In fact, at this time last year the funded ratio for these plans was roughly ten percentage points higher, at 93.1%, than we’re seeing now. Looking forward, under an optimistic forecast with rising interest rates (reaching 3.15% by the end of 2019 and 3.75% by the end of 2020) and asset gains (10.6% annual returns), the funded ratio would climb to 88% by the end of 2019 and 103% by the end of 2020.  Under a pessimistic forecast (2.75% discount rate at the end of 2019 and 2.15% by the end of 2020 and 2.6% annual returns), the funded ratio would decline to 82% by the end of 2019 and 75% 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.

Addressing Australia’s superannuation gap

A goal of many working Australians is to maintain their current lifestyle through retirement. However, there are some issues with the Australia’s superannuation system that may hamper their retirement goals. In this article, Milliman consultant Jeff Gebler explains why the gap between investment objectives and member outcomes needs to be addressed more effectively.