What does corporate pension funding look like by sector? (Infographic)

Milliman recently released the 19th edition of its Corporate Pension Funding Study, which analyzes funding information for the 100 largest U.S. corporate pension plans. New this year, the study also includes an analysis of pension plan funding by business sector including funded ratio, asset allocation, and expected investment returns.

Corporate pension funding ratio climbs to 87.1% at 2018 year-end despite worst asset performance in a decade

Milliman today released the results of its 2019 Corporate Pension Funding Study (PFS), which analyzes the 100 largest U.S. corporate pension plans. Employers in Milliman’s PFS continued last year’s trend of large pension contributions, adding $57.5 billion in funds to their pensions in 2018. This year saw three of the top ten largest contributions in the history of the PFS, from AT&T ($9.3 billion, second-largest in PFS history), General Electric ($6.8 billion, 4th largest), and Lockheed Martin Corporation ($5 billion). Employer contributions have totaled nearly $120 billion over the last two years, exceeding any two-year period in our study’s history.  With that said, contribution levels are expected to decrease in fiscal year 2019.

Along with the contributions noted above, a large discount rate increase helped drive an overall pension funding improvement for PFS plans in 2018, despite disappointing investment losses of 2.8%. The funded ratio for the Milliman 100 pensions rose from 85.8% at the end of 2017 to 87.1% at the end of 2018, though the year’s asset performance was the worst seen since 2008. The discount rate climbed 52 basis points in 2018, the second-largest annual increase since the PFS began tracking funding.

We’re accustomed to faulting the low discount rate climate and its negative effect on pension funding, but in 2018 discount rate increases as well as large plan sponsor contributions helped dig corporate pensions out of the funding hole created by investments losses. In fact, this was the first time in our study’s history that we had a negative asset return and yet corporate pension funding improved.

New this year, the study also includes an analysis of pension funding across business sectors.  For instance, the study found that plans in the financial services sector have an average funding ratio of 100%, while corporate pensions in the industrials, energy, and basic materials sectors have an average funding ratio below 85%.

To view the complete 2019 Milliman Corporate Pension Funding Study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

Regulatory roundup

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

Proposed rule on joint employer status under FLSA issued
The U.S. Department of Labor (DoL) announced a proposed rule to revise and clarify the responsibilities of employers and joint employers to employees in joint employer arrangements. The Department has not meaningfully revised its joint employer regulation since 1958.

The Fair Labor Standards Act (FLSA) allows joint employer situations where an employer and a joint employer are jointly responsible for the employee’s wages. This proposal would ensure employers and joint employers clearly understand their responsibilities to pay at least the federal minimum wage for all hours worked and overtime for all hours worked over 40 in a workweek.

The Department proposes a clear, four-factor test—based on well-established precedent—that would consider whether the potential joint employer actually exercises the power to:

• Hire or fire the employee
• Supervise and control the employee’s work schedules or conditions of employment
• Determine the employee’s rate and method of payment
• Maintain the employee’s employment records.

For more information, click here.

PBGC offering a pre-filing consultation for ERISA 4010 filers
The Pension Benefit Guaranty Corporation (PBGC) now offers a pre-filing consultation for ERISA 4010 filers, especially first-time filers, looking for guidance on filing requirements. PBGC staff will provide an overview of the process, share helpful tips on how to use the e-filing software, and provide insights on how to avoid common filing errors.

To schedule a pre-filing consultation, send an email to [email protected] or call (202)-326-4000 ext. 3075.

New GAO report explores phased retirement for older workers
In response to an aging workforce, countries around the world have developed policies to encourage older workers to work longer to improve the financial sustainability of national pension systems and address shortages of skilled workers. Phased retirement is one option that can be used to encourage older workers to stay in the workforce. The Government Accountability Office (GAO) was asked to look at phased retirement programs in the United States and other countries. In June 2017, GAO issued a report (GAO-17-536) that looked at phased retirement in the United States, where formal phased retirement programs are as yet uncommon. This report looks at phased retirement in other countries.

Specifically, GAO examined (1) the extent to which phased retirement exists in other countries with aging populations, (2) the key aspects of phased retirement programs in selected countries, and (3) the experiences of other countries in providing phased retirement and how their experiences can inform policies in the United States.

GAO analyzed relevant data, reviewed academic research, and conducted interviews to identify countries with phased retirement, and selected four countries with national policies permitting phased retirement programs with broad coverage for case studies. GAO also conducted interviews with government officials, unions, employer associations, and other experts.

To download the entire report, click here.

New CRS report on retirement savings contribution credit
The 116th Congress has shown interest in advancing policies that support retirement savings and retirement security. One provision designed to encourage retirement savings for low-income workers is the Retirement Savings Contribution Credit, or the Saver’s Credit (Internal Revenue Code [IRC] §25B). In a new report, the Congressional Research Service provides an overview of the credit and provides a brief discussion of the credit’s effectiveness, in the context of various policy options that might be considered in the 116th Congress.

To download the report, click here.

Employee benefits due diligence enhance M&A negotiations

Bristol-Myers Squibb’s proposed acquisition of pharmaceutical company Celgene may have set the stage for biotech merger and acquisition (M&A) transactions this year. While certain aspects of M&A negotiations are secondary or tertiary aspects, they can ultimately make or break a deal.

For example, companies can encounter serious issues when acquiring a variety of unfamiliar retirement and health insurance programs. Companies typically like to delay due diligence of employee benefits to maintain the confidentiality of the impending deal and because employee benefits may be perceived as being less material to the decision about whether to proceed or not. Unfortunately, this level of discretion can be costly, as employee benefit programs can deeply affect a potential deal, sometimes to the surprise of the acquiring company.

In this article, Milliman’s William Strange offers several steps companies can implement to better manage employee benefits programs during M&A deals.

Regulatory roundup

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

Updated mortality improvement rates and static mortality tables for defined benefit plans
The Internal Revenue Service (IRS) released updated mortality improvement rates and static mortality tables for defined benefit pension plans for 2020. Notice 2019-26 sets forth the updated mortality improvement rates and static mortality tables that are used for purposes of determining: 1) the minimum funding requirements under § 430(h)(3) for 2020; and 2) the minimum present value under § 417(e)(3) for distributions with annuity starting dates that occur during stability periods beginning in the 2020 calendar year.

For more information, click here.

Proposed overtime rule published
The Wage and Hour Division of the U.S. Department of Labor (DoL) published a proposed rule on overtime pay in the Federal Register. Public comments should be submitted on or before May 21, 2019. Commenters should transmit comments early to ensure timely receipt prior to the close of the comment period.

For more information, click here.

DoL proposed new overtime pay threshold for white collar exemptions

The U.S. Department of Labor (DoL) released a new proposed rule that would raise the minimum salary requirements for exemptions for executive, administrative, and professional employees under the overtime pay requirements of the Fair Labor Standards Act (FLSA). Under the proposed rule, the minimum salary threshold would increase to $35,308/year ($679/week), up from the current $23,660/year ($455/week).

In 2016, the DoL issued a final rule that raised the current threshold—which had not increased since 2004—to $47,476/year ($913/week) (see Client Action Bulletin 16-2). In 2017, a federal district court invalidated the rule, but the DoL, under a new administration, appealed to the Fifth Circuit. The DoL also asked the court to hold the appeal while the agency reconsidered proposing an appropriate salary level.

The new proposed rule also would:

• Increase the total annual compensation requirement for “highly compensated employees” from the current $100,000 to $146,414
• Commit the DoL to periodically review the salary threshold via the proposed rulemaking process every four years
• Allow employers to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the salary level threshold

The proposed rule makes no changes to the FLSA’s “duties tests.”

Following publication in the Federal Register, the proposed rule will be open for public comment for 60 days. (As of March 19, the proposed rule has not been published.) The DoL hopes to finalize the rule in time to apply it beginning in January 2020.

Employers should begin to evaluate how the rule will affect their pay and job classification practices with an eye toward changes that may be necessary if a final rule applies in 2020. In addition, employers should consider the effects any final rule might have on their benefit programs (e.g., overtime compensation under a retirement plan’s contribution formula and differing contribution requirements for healthcare coverage based on FLSA exempt/nonexempt status) and plan accordingly.

Please contact your Milliman consultant for additional information about the DoL’s proposed rule.