Investment gains, higher discount rates lead to $28 billion corporate funded status improvement in March

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In March, the deficit for these pension plans decreased from $275 billion to $247 billion, a $28 billion improvement that resulted from robust asset returns and an increase in benchmark corporate bond rates used to value pension liabilities. The funded ratio for these pensions climbed from 83.8% to 85.3% as of March 31.

The first quarter of 2017 has seen the cumulative asset values of the Milliman 100 pension plans exceed expectations – increasing by $37 billion thanks to strong recurring investment returns – while discount rates are just shy of where they were at the beginning of the year. Overall, funded status has increased by $33 billion during the quarter.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.41% by the end of 2017 and 5.01% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 95% by the end of 2017 and 108% by the end of 2018. Under a pessimistic forecast (3.51% discount rate at the end of 2017 and 2.91% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 80% by the end of 2017 and 73% by the end of 2018.

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

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

Milliman adds Holzer Health System as retirement services client

Milliman has added Holzer Health System as a defined contribution client. Holzer Health System is a multi-discipline healthcare system with more than 160 providers and 2,400 employees providing services in over 30 areas of expertise from 15 locations throughout Ohio and western West Virginia.

“We chose Milliman for their reputation of being a trusted service provider who values commitment to client service. In addition to service, the website is user friendly and includes robust tools to assist participants in planning for retirement. Partnership with providers is a critical decision, and Milliman’s unique ability to design services and systems to meet the needs of all our retirement plan participants was a strong factor in our decision making,” says Lisa Halley, vice president of human resources.

Milliman will provide recordkeeping, administration, communications, and compliance services for the Holzer Health System 401(a), 403(b) and 457(b) plans. The Robertson Group at Morgan Stanley headquartered in Columbus, Ohio, is the independent co-fiduciary investment advisor providing consulting services and participant education for the plans.

We look forward to an enduring relationship with Holzer Health System, and we are honored they selected us. At Milliman, our focus is to provide superior service and value which exceeds our client’s expectations. We believe that strong service and a commitment to the industry is what most plan sponsors want and need.

For more information about Milliman’s employee benefit services, click here.

Employee benefit plan considerations for M&As

This blog is the first in a series of six that will highlight considerations for and impact of employee benefit plans on mergers and acquisitions (M&A) transactions.

Seventy-five percent of U.S. employers in the 2017 Global Capital Confidence Barometer survey say they plan to pursue M&A deals in the next 12 months.

This follows a year that saw a number of large transactions—AT&T and Time Warner for $84 billion, Bayer’s acquisition of Monsanto for $66 billion, and the merger of Sunoco Logistics Partners and Energy Transfer Partners in a $21 billion all-stock deal.

No matter whether it’s a billion-dollar transaction or something much, much smaller, employee benefit plans are a critical component of the deal. They can impact the purchase or sale price, and create both financial and compliance risks if comprehensive due diligence is not completed.

The following tips will be helpful as you consider the employee benefits component of the deal—no matter which side of the table you’re on.

1. UNDERSTAND THE RISKS
Due diligence is a critical first step in a merger or acquisition transaction. Because the new entity (buyer or merged organization) is generally responsible for the employee benefit plans, including liabilities, it’s important to have a clear and complete picture of the plans and any associated risks before the deal is closed.

Don’t rely on the seller’s representation of the condition of the benefit plans. Market conditions may have changed since the plans were valued—including changes in asset performance and market interest rates. There may be unfunded pension liabilities, tax penalties that are due to noncompliance, or even potential lawsuits because of nondisclosed but promised retiree benefits. They all can impact the purchase price and the deal negotiation.

Be sure to get your employee benefits consultant, plan actuary, and recordkeeper involved early in the due diligence phase. If you wait to think about benefits until after closing, it’s too late. The deal is done—and you may have unintentionally acquired some risk, and without proper adjustments to the purchase price

In addition, appropriate, well-timed communication is critical to talent management—the most critical asset in the deal. Retention of key management is sensitive and important. Communicating the strategic vision and benefits of the transaction to employees is a key component to the success of any transaction.

2. PUT IT IN PERSPECTIVE
As you consider the impact of benefit plans on the transaction, also take into account how the type of deal—asset or stock—can impact the buyer’s or seller’s perspective. See the chart below for a high-level overview.

3. ASK GOOD QUESTIONS
Finally, don’t wait until after closing to develop a game plan for integration. Ask questions. Consider options. Dig into the details.

For example:

• Will you terminate, spin off, merge, or go with stand-alone compensation and benefit plans?
• How will you map investments?
• Will you reenroll current employees? Auto-enroll new employees?
• Are there union issues?
• How will you handle vesting and loans?
• What’s the impact of current legal or regulatory activity?
• How do the employee demographics differ?
• How do the two cultures fit?
• Which benefit plans and features best fit the new company strategy and its employees?
• What should the new executive and broad-based compensation programs look like?
• What acquired employees are critical to retain?
• What communication and programs need to be in place to retain key talent?

All are good questions—and how you answer them can impact the transaction and potentially the sale price. Know the answers up-front and you can mitigate risk and ease the transition.

To learn how Milliman consultants can help your organization with the employee benefits aspects of M&As, click here.

Milliman FRM market commentary: March 2017

S&P 500 dividends have increased at more than two times the rate of inflation over the last 30 years.

The S&P 500 CAPE ratio sits above its pre-crisis peak. Year-over-year PCE, the Fed’s preferred measure of inflation, climbed above 2% for the first time since 2012. An ocean of excess reserves diminishes the Fed’s ability to respond to inflation. Risk management, like insurance, is only a benefit when implemented ahead of a risk event.

To learn more, read Joe Becker‘s full commentary at MRIC.com.

Employers honored with Save 10 award for helping their employees save for retirement

Save 10 awardees at the Seattle event with their Milliman consultants and special guests Milliman Chairman Ken Mungan and Francis Creighton of Financial Services Roundtable. Photo by Ryan Hart

Twelve employers based in the Pacific Northwest were recognized with the Save 10 award during the 45th annual Milliman Employee Benefits Conference held in Seattle on April 6. The Save 10 award honors their work helping their employees save for retirement.

The Save 10 initiative is a movement to reinforce a “Save 10” rule of thumb, recognizing employers who help their employees to save at least 10% of their income toward retirement. Why Save 10? According to Francis Creighton, Executive Vice President of Government Affairs of Financial Services Roundtable, which sponsors the initiative, 10% is easy to remember and reflects the old adage of saving at least 10% of your income for retirement. While this may not be the ideal contribution rate for everyone, getting employees to save for retirement, and providing employers the tools to allow their employees to do so, remains fundamental.

The Save 10 initiative emphasizes the effectiveness of auto features in retirement plans, such as auto enrollment and auto escalation. Research shows that auto features encourage employees to save, even though they may not remember to sign up and start saving from their hire date. The rate of success in saving increases even more for employees with auto escalation of contribution rates.

Milliman is proud to work with companies that want to provide the best benefits for their employees. Milliman works closely with employers to help provide best-in-class retirement plans for their employees that reflect the philosophy and unique identity of each organization.

Employers honored at the April 6 event were: Expeditors International of Washington, Inc., ICOM America, Inc., McKinstry Co., M Financial Group, Nelson Irrigation Corporation, Olympia Federal Savings, PACCAR Inc., Swanson Group, Inc., Usibelli Coal Mine, Inc., Valley Medical Center, Washington Permanente Medical Group, and Zimmer Gunsul Frasca Architects, LLP.

More information about the initiative is available at www.save10.org.