Despite global pandemic, corporate pension performance for FY 2020 improves slightly over FY 2019

Milliman today released the results of its 2021 Corporate Pension Funding Study (PFS), which analyzes the 100 largest U.S. corporate pension plans. This marks the 21st consecutive year in which the report has been published.

In 2020, despite a 67-basis-point decline in the discount rate, the funded ratio for the Milliman 100 plans climbed slightly, from 87.5% at fiscal year-end (FYE) 2019 to 88.4% at FYE 2020. The year-over-year improvement was the result of better-than-expected investment returns of 13.4%, leading to a PFS all-time-high in the market value of assets, at $1.77 trillion.  After accounting for contributions and benefit payments including settlements, the total asset growth for the year was 9%.

However, this improvement in plan assets was offset by an 8% growth in pension liabilities, with the discount rate dropping from 3.08% at FYE 2019 to 2.41% at FYE 2020. This marks the first time in the 21-year history of the PFS that the discount rate has dropped below 3.00%. Other items of interest from the 2021 PFS include:

  • Pension expense (the charge to the income statement under Accounting Standards Codification Subtopic 715) decreased to $17.7 billion in FY 2020 from $26.1 billion in FY 2019.
  • 19 plans had a funded ratio of at least 100% compared to 14 plans from the 2020 Milliman PFS.
  • Among the Milliman 100 pension plans, settlement payouts totaled an estimated $15.8 billion in FY 2020, up from the $13.5 billion in FY 2019.
  • Average return on asset expectations for FY 2020 were lowered to 6.2% per year from 6.5% per year for FY 2019. This was the largest annual drop in return expectations experienced over the last decade.

Corporate pensions demonstrated their resilience in 2020 amidst a turbulent year of market volatility, declining discount rates, and employer stressors. With a possible end in sight to the pandemic, and funding relief such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act and now the American Rescue Plan Act of 2021, the outlook for these plans is much better than it was 12 months ago.

To view the complete 2021 Milliman Corporate Pension Funding Study, click here.

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

Competitive pricing rate for pension risk transfer costs drops to 99.1% in December, setting another record low

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.

During December, the average estimated cost to transfer retiree pension risk to an insurer remained flat, at 101.8% of a plan’s total liabilities. This means the average estimated retiree PRT cost for the month is now 1.8% more than those plans’ retiree accumulated benefit obligation (ABO). Annuity purchase costs reflecting competition among insurers once again hit a record low, dropping from 99.4% in November to 99.1% in December. This is the second time competitive rates have dipped below 100% since Milliman began tracking the MPBI.

Pension risk transfer activity for 2020 ended on a strong note, given the slow start at the beginning of the year. Low pricing rates may have spurred buyouts in the fourth quarter (Q4), but we’ll see if the trend continues into 2021.

The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from eight insurers, to estimate the average and competitive costs of a PRT annuity de-risking strategy. Individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape.

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

Required minimum distributions beginning in 2020

Required minimum distribution (RMD) is the minimum amount that U.S. tax laws require to be withdrawn by participants every year. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed in late December 2019, changed the retirement age at which RMDs are required from 70½ to 72 years for individuals who will reach age 70½ after December 31, 2019.

In general, if a participant reached the age of 70½ in 2019, the prior rule applies and the participant must take the first RMD by April 1, 2020. If the participant reaches age 70½ in 2020 or later, the first RMD must be taken by April 1 of the year after reaching 72. For all subsequent years, including the year in which the participant was paid the first RMD by April 1, the RMD must be taken by December 31 of that year.

Participants should remember that if they are active and participating in a retirement plan sponsored by their employers and don’t own more than 5% of the company, RMDs typically do not apply to that particular account until they retire. However, there could be exceptions to this rule for plans that require RMDs for active participants based on age only or for participants who die before RMDs begin.

The RMD age change should not be confused with a change in the latest Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act waives RMDs during 2020 for individual retirement accounts (IRAs) and retirement plans, including beneficiaries with inherited accounts. This waiver also includes RMDs for individuals who turned 70½ in 2019 and took their first RMD in 2020.

RMDs were introduced so that participants wouldn’t be able to avoid paying taxes forever. They would have to withdraw from their accounts or else they could face a penalty. Failure to take RMDs on time could result in a 50% tax penalty. In other words, the plan participant who should have received the RMD is liable for an excise tax under Internal Revenue Code Section 4974 equal to 50% of the amount of the RMD not received. Also, the plan sponsor could face plan disqualification—that means the plan loses its tax-exempt status and the many advantages that come along with that status. 

There are some positives that come with this retirement age change:

  • People can plan their taxes in a better way. They can defer taxes on any income and gains that the assets in their retirement accounts will generate. This will let their savings sit for a longer time.
  • People can minimize their annual tax impacts.
  • People can reap benefits due to the delay in forced distribution or mandatory distribution. In other words, they don’t need to worry about the reinvestment of an unwanted RMD amount, and this means no depletion of their account.
  • People who have sizable retirement account balances will find the later RMDs attractive because they don’t have to withdraw their money.
  • People can easily remember their time of RMD withdrawals. Calculation of RMD becomes simpler because no one has to track the 70½ age marker. Instead, they just have to wait for their 72nd birthday to be RMD-eligible.

However, there are also some items to note about RMDs and the change in RMD age:  

For participants:

  • People can face alternate tax withholding requirements if they withdraw more than what is required due to the RMD age change. They are required to pay 20% withholding in federal income tax on the amount above the RMD. The only way to avoid this tax on the overage is to roll over the excess to another qualified retirement plan or IRA. Therefore, this age change isn’t happy news for people who might have to withdraw more than required.
  • People’s retirement funds can be affected if they make changes in their lifestyle spending. Making those changes can seem attractive, and people may even consider it a good decision. But this can affect retirement planning and funds if not handled wisely. A delay in RMD could lead to changes in retirement planning, which might further lead to changes in lifestyle spending.

For plan sponsors:

  • Plan procedures need to be changed. Various forms and letters describing details of participants’ RMDs are sent to them every year. These plan procedures need to be updated so that they have the correct RMD information. In simple terms, all documents and procedures related to the plan need to be amended. Failure to update the documents may result in penalties and plan disqualification.
  • Participants must be given notices in a timely manner.  Once all the documents are updated, it’s the employer’s responsibility to ensure the participants receive information in a timely fashion to avoid any penalty. If the new rules are not properly implemented, it could result in plan administration errors. Employers and sponsors should work with administrators to ensure proper handling to avoid any such delays or errors. They must take care of errors while calculating the RMDs such as missing accounts, using the wrong balance, incorrect Internal Revenue Service (IRS) tables, incorrect ages, or missing RMD altogether.  Advisers also need to review their technology and planning processes and change them accordingly if needed. These mistakes may seem common, but they bring huge penalties if not corrected quickly.

Ultimately, the change in the RMD starting age won’t affect the population that is  already taking the RMD and will continue doing so regardless of their age. But one cannot ignore the fact that, while the RMD age change might seem small, it will bring lots of changes in paperwork and retirement income planning for people who are affected.

AFM grants licence for investment services to Milliman Financial Strategies

The Netherlands Authority for the Financial Markets (AFM) granted Milliman Financial Strategies B.V. (MFS) a licence for investment services at the end of 2020 (Article 2:96 of the Financial Supervision Act). MFS, with an execution platform in Chicago, London, Amsterdam and Sydney, manages financial balance sheet risks of pension funds and insurers worldwide. In 2018, due to the approaching Brexit, it was decided to serve the European clients of MFS from Amsterdam in addition to London. With the licence granted, MFS can continue to manage financial balance sheet risks for Dutch financial institutions, including pension funds.

“The asset management market is changing rapidly and is under pressure from increasing competition and regulation, resulting in lower management fees and higher costs. Since its inception in 1998, Milliman Financial Strategies has invested in state-of-the-art technology to provide its clients with effective, efficient and transparent hedging solutions. As a result, we are well positioned for these changes in the asset management market,” said Marcel Kruse, Director at Milliman.

“For many years, Milliman Financial Strategies has been helping financial institutions in the United States, Canada, Europe, Australia and Japan to manage market risks on their balance sheets. We are delighted to add our Amsterdam office to our global trading platform and offer our tailored hedging solutions to Dutch pension funds,” said Sam Nandi, Principal and Managing Director at Milliman.

“Milliman’s hedging and overlay solutions stand out from existing providers because we combine the innovative and solution-oriented approach of our consultancy practice with a robust in-house developed system architecture and enrich it with our actuarial knowledge and expertise, including that of Dutch pension funds and pension schemes,” said Rajish Sagoenie, Principal and Managing Director at Milliman.

Public pensions’ funded ratio soars to record-setting 78.6% in Q4 2020

Milliman today released the fourth quarter (Q4) 2020 results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans.

Public pensions had a stellar final quarter of 2020, with the funded status of the Milliman 100 plans increasing from 72.6% at the end of September to 78.6% as of December 31. This funded ratio is the highest recorded in the history of Milliman’s Public Pension Funding Study and marks quite a swing from Q1 2020, at the onset of the COVID-19 pandemic, when the funded ratio hit a low of 66.0%.

The first and fourth quarters of 2020 illustrate just how closely public pension funding is tied to the vagaries of the market. Given the swings we saw this past year, the start of 2021 is a good time for plan sponsors to revisit their plans’ investment portfolios to make sure the investment strategy matches their current risk appetite.

In aggregate, PPFI plans experienced an estimated investment return of 8.36% in Q4 2020, resulting in a $388 billion gain in the market value of assets. This was offset by approximately $25 billion flowing out of the plans, as benefits paid out exceeded contributions coming in from employers and plan members. Twenty-nine plans now stand above the 90% funded mark, compared with 12 plans at the end of Q2 2020. Meanwhile, at the lower end of the spectrum, four plans moved above 60% funded, bringing the total number of plans under this mark to 22.

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

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

Corporate pensions end 2020 with funded ratio of 88.2%

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 2020, corporate pension funding ended down $50 billion for the year, with the funding ratio dropping from 89.8% at the end of 2019 to 88.2% as of December 31, 2020.

Plan assets outperformed expectations, posting an annual return of 11.72% and a gain of $125 billion. But record-low discount rates resulted in plan liabilities increasing as well, by $175 billion during 2020. As of December 31, the Milliman 100 discount rate had fallen 74 basis points, from 3.20% at the end of 2019 to 2.46% a year later.

Year-end discount rates have declined in seven of the last 10 years, hitting a new record-low in 2020; however, asset returns for the Milliman 100 plans have exceeded return expectations in seven of the last 10 years as well and have been limiting funded status erosion. As we move into 2021, plan sponsors will likely be eyeing the new Congress and White House administration and ensuing corporate tax policy changes that may impact the pension funding environment, such as an extension of interest rate relief under the Pension Protection Act.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.06% by the end of 2021 and 3.66% by the end of 2022) and asset gains (10.5% annual returns), the funded ratio would climb to 104% by the end of 2021 and 123% by the end of 2022.  Under a pessimistic forecast (1.86% discount rate at the end of 2021 and 1.26% by the end of 2022 and 2.5% annual returns), the funded ratio would decline to 81% by the end of 2021 and 75% by the end of 2022.

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.