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

Milliman today released the fourth quarter 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.

COVID-19: So many questions for employers about their 401(k) plans (pt. 2, updated December 2020)

The year 2020 saw COVID-19 challenges for plan sponsors and participants across the retirement industry. My prior blog asked the following questions: (1) Are 401(k) savings plans facing “partial plan terminations”? (2) What will happen with 401(k) safe harbor plan contributions? (3) Can employer matching contributions be suspended?

This update addresses a change for partial plan terminations.

What about partial plan terminations? Hot off the press, in the $900 billion COVID-19 stimulus package just passed by Congress, partial terminations are addressed.  As a refresher, “partial termination” is a term in the tax code. It means there has been more than a 20% reduction in an employer’s workforce due to unforeseen business circumstances causing financial issues or a business downturn during the year. It results in 100% vesting of retirement benefits for those employees affected, meaning the employees who lost their jobs.

The bill states: A plan shall not be treated as having a partial termination (within the meaning of 411(d) (3) of the Internal Revenue Code of 1986) during any plan year which includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered by the plan on March 13, 2020.

What does this mean? Plan sponsors of defined contribution retirement plans—401(k), profit sharing—will not incur a partial plan termination if the active participant count in the plan at March 2021 is 80% of the active participant count at the time the COVID-19 national emergency was declared.

Although the new legislation is for this time period only, it may help alleviate financial difficulties for businesses across all industries. For businesses that have been able to successfully weather the financial downturn, rebuild their business, and hire and rehire more staff, a partial termination worry is not there.

For information on these topics or the Coronavirus Aid, Relief, and Economic Security (CARES) Act related to COVID-19, contact your Milliman consultant.

COVID-19 vaccine considerations for multiemployer plan sponsors

Following the issuance of the emergency use authorization (EUA) by the U.S. Food and Drug Administration (FDA) of the Pfizer-BioNTech and Moderna COVID-19 vaccines, plan sponsors need to consider how to cover the administration of the COVID-19 vaccines for their memberships. 

In addition to vaccine administration coverage, plan sponsors have been faced with other decisions relating to COVID-19 throughout 2020, and have taken various approaches to addressing issues resulting from the pandemic. 

At this point, the expectation is that the federal government will pick up the cost of the vaccine itself for nongovernmental plans. Coverage for the cost of administration of the vaccine will depend on the grandfathered status of the plan.  

In this Multiemployer Alert, Milliman’s Michael HalfordSean Silva, and David Stoddard provide plan administrators with information they should consider as 2020 comes to a close. 

Competitive pricing rate for pension risk transfer costs drops to 99.4% in November, setting record MPBI 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 November, the average estimated cost to transfer retiree pension risk to an insurer decreased by 110 basis points, from 102.9% of a plan’s total liabilities to 101.8% of those 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 are even lower, dropping from 100.3% in October to 99.4% in November. This is the first time competitive rates have dropped below 100% since Milliman began tracking the MPBI.

November’s record-low competitive buyout pricing rate, at 99.4%, reflects what we’ve been seeing for some plans in the market. While the buyout market softened in 2020 as a result of the COVID-19 pandemic, low competitive rates may spur activity as we close out the year and move 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.

Public pensions funded ratio climbs to 72.6% in Q3 2020, up from 70.7%

Milliman today released the third quarter (Q3) 2020 results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans.

During Q3 2020, the upward trend in asset returns continued for public pensions, reflecting continued strong growth in markets following the initial COVID-19-induced economic impact in Q1. Third-quarter investment gains propelled the estimated funded status of the 100 largest U.S. public pension plans from 70.7% at the end of June 2020 to 72.6% at the end of September 2020. The plans gained market value of approximately $155 billion, which was offset by approximately $25 billion flowing out, as benefits paid out exceeded contributions coming in from employers and plan members.

Overall for Q3 there are now 15 plans above the 90% funded mark; 12 plans stood above this benchmark at the end of Q2 2020. Meanwhile, at the lower end of the spectrum, two plans moved above 60% funded, bringing the total number of plans under this mark to 26, down from 28 at Q2 2020.

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

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