Multiemployer pension plans nearing healthiest funding since market collapse of 2008

Milliman has released the results of its Fall 2017 Multiemployer Pension Funding Study, which analyzes the funded status of all multiemployer pension plans. As of June 30, 2017, these plans are nearing the healthiest they’ve been since U.S. financial markets collapsed in 2008. In the first six months of 2017, the aggregate funding percentage for all multiemployer pensions climbed from 77% to 81%, reducing the system’s shortfall by $21 billion – an improvement driven largely by favorable investment returns.

In aggregate, asset growth for multiemployer plans far outpaced assumptions for the first half of 2017. But that bears little weight for critical plans, which are hurt by their substantially lower asset base. Despite the bull market, we’re seeing the funding gap continue to widen between critical and noncritical plans.

While noncritical plans are nearing an aggregate funded percentage of 90%, the funding level for critical plans remains around 60%. Currently about a quarter of the plans tracked by Milliman’s Multiemployer study fall within critical levels, with some of the most troubled on track to rely on assistance from the PBGC – which itself is facing severe financial challenges. Comparatively, of the approximately 1,250 plans analyzed in the study, around 75% are considered noncritical.

To view the complete study, click here.

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

COLAs for retirement, Social Security, and health benefits for 2018

With the release of the September 2017 Consumer Price Index (CPI) by the Bureau of Labor Statistics, the Social Security Administration (SSA) and the IRS have announced cost-of-living adjusted figures for Social Security and retirement plan benefits, respectively, for 2018. The 2018 adjusted figures for high-deductible health plans (HDHPs) and health savings accounts (HSAs) included in this Client Action Bulletin were released by the IRS earlier this year and are provided here for convenience.

Milliman FRM Market Commentary: September 2017

Developed markets charged ahead as emerging market (EM) equities snapped a 9-month streak of positive returns. In this month’s commentary, Milliman’s Joe Becker, Adam Schenck, and Jeff Greco address the following:

• Equity market volatility remained historically low in September, capping off a record-setting Q3.
• September locked in a stat for the US equity market not seen since Dwight Eisenhower was president.
• A divergence of inflation metrics weighs on the Fed as it begins balance sheet normalization.

To learn more, download the full commentary at MRIC.com.

Regulatory roundup

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

Proposed rule on claims procedure for plan providing disability benefits; extension of applicability date
The Department of Labor (DOL) has proposed a delay to the applicability of the final rule amending the claims procedure requirements applicable to ERISA-covered employee benefit plans that provide disability benefits for 90 days – through April 1, 2018.

The final rule was published in the Federal Register on December 19, 2016, and became effective on January 18, 2017. The rule is currently scheduled to apply to claims for disability benefits under ERISA-covered employee benefit plans that are filed on or after January 1, 2018.

For more information on the proposed rule, click here.

Guidance providing funding methods for single-employer defined benefit plans
The Internal Revenue Service (IRS) has released two pieces of guidance providing funding methods for single-employer defined benefit plans.

Revenue Procedure 2017-56 updates Rev. Proc. 2000-40 to take into account the provisions of § 430 of the Internal Revenue Code, which was enacted as part of the Pension Protection Act of 2006. This revenue procedure provides automatic approval for certain changes in funding method used for single-employer defined benefit plans for calculations described under § 430. The approvals under this revenue procedure are granted in accordance with § 412(d)(1) of the Code and section 302(d)(1) of the Employee Retirement Income Security Act of 1974, as amended.

Revenue Procedure 2017-57 updates Rev. Proc. 2000-41 to take into account the enactment of subsequent legislation. This revenue procedure sets forth the procedure for obtaining approval of the Internal Revenue Service (IRS) for a change in the funding method used for a defined benefit plan, as provided by § 412(d)(1) of the Internal Revenue Code and section 302(d)(1) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). This revenue procedure also sets forth the procedure for obtaining approval of the IRS to revoke an election relating to interest rates pursuant to § 430(h)(2)(D)(ii) or § 430(h)(2)(E) of the Code and the corresponding sections of ERISA.

For more information on Revenue Procedure 2017-56, click here.

For more information on Revenue Procedure 2017-57, click here.

IRS issues final rule on mortality tables for defined benefit plans

The Treasury Department and the IRS released a final rule updating the mortality assumptions that single-employer defined benefit (DB) pension plans must use to calculate the actuarial liabilities for minimum funding requirements, benefit restrictions, and the Pension Benefit Guaranty Corporation (PBGC) variable-rate premiums. The updated mortality tables are also used to calculate lump-sum distributions to plan participants in DB plans that offer such one-time payments. The final rule generally is applicable for plan years beginning on or after Jan. 1, 2018, but also provides a limited one-year transition period (to Jan. 1, 2019), in certain circumstances.

The IRS concurrently released Notice 2017-60, with two mortality tables. The first is a sex-distinct table for the above-mentioned one-year 2018 transition period. The second is a unisex table (blended as 50% female mortality rates and 50% male mortality rates) that must be used for the calculation of certain optional forms of payments, such as lump-sum distributions, beginning with the 2018 plan years. Also released was Revenue Procedure 2017-55, providing instructions to obtain IRS approval of plan-specific mortality tables.

Although the final rule is aimed at single-employer DB plans, its mortality assumptions are also used to determine “current liability” for multiemployer pension plans and cooperative and small employer charity (CSEC) plans. This Client Action Bulletin provides more perspective on the final rule.

Corporate pensions experience largest gains of the year in September

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In September, these pension plans experienced their largest improvement year-to-date, with a $26 billion increase in funded status. The improvement was the result of a nine-basis-point increase in discount rates coupled with market value gains, which saw the Milliman PFI plans’ funded ratio climb from 83.0% to 84.3% for the month.

While September’s positive performance is welcome news for these pensions, it’s tempered somewhat by the recent release of the new mortality tables by the IRS. Much of the fourth quarter will be spent in anticipation of how the new regulation will affect 2018 cash contribution funding, PBGC premiums, and de-risking efforts.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.84% by the end of 2017 and 4.44% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 87% by the end of 2017 and 101% by the end of 2018. Under a pessimistic forecast (3.54% discount rate at the end of 2017 and 2.94% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 83% by the end of 2017 and 76% by the end of 2018.

To view the complete Pension Funding Index, click here. Also, to see the 2017 Milliman Pension Funding Study, click here.

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