Public pensions rebound in Q2 with $308 billion asset gain

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

During Q2 2020, public pension funding rebounded gaining $308 billion in the market value of assets and reversing Q1 losses. The PPFI plans saw investment returns of approximately 10.72% for the quarter, nearly completing the recovery from the -10.81% returns suffered in Q1. The estimated funded ratio for these pensions rebounded from 66.0% at the end of March 2020 to 71.2% at the end of June 2020.

While public pension funding status has improved dramatically over the past three months, the longer-term economic impact of COVID-19 on funding remains uncertain. Returns for the past twelve months ending June 2020 averaged just 3.84% – markedly lower than plan sponsor reported funding interest rates – which means the 2019-2020 reporting year will likely go into the books as a year of modest investment losses, despite the Q2 rally.

As of Q2 2020, there are 12 PPFI plans above the 90% funded mark; just four plans stood above this benchmark at the end of Q1 2020. Meanwhile, at the lower end of the spectrum seven plans moved above 60% funded, bringing the total number of plans under this mark to 28, down from 35 at Q1 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.

Meeting funding improvement or rehabilitation period requirement considerations

Many multiemployer pension plan trustees and advisers are familiar with the potential penalties associated with untimely adoption of a funding improvement plan (FIP) or rehabilitation plan (RP) for plans in endangered or critical status. Those who have worked with critical status plans are also probably aware that a failure to meet “scheduled progress” under an RP for three consecutive years can result in excise taxes.

However, many may be less familiar with the rules providing potential excise taxes and/or civil fines for failing to meet the FIP’s or RP’s goals by the end of the prescribed period. This could result in a new and sudden reality for some plans due to the impact of the coronavirus on the stock market and employment levels.

Once the FIP/RP period begins, the plan sponsor is required to annually review the FIP/RP and update it if necessary. There could be a wide range of reasons for needing an update, many that are outside the control of the plan sponsor, including lower investment returns and/or contributions than expected. Milliman consultant Bill Wade provides more perspective in this Multiemployer Review.

Complying with nonqualified deferred compensation plan payment elections

Internal Revenue Code Section 409A contains strict rules limiting the ability of nonqualified deferred compensation plan (NDCP) participants to change their benefit commencement date (BCD) under the plan. These rules provide that, subject to certain exceptions, a change in the BCD will usually constitute an impermissible acceleration of deferral of payments under the NDCP.

In this article, Milliman’s Dominick Pizzano and White & Case’s Henrik Patel and Kenneth Barr examine how NDCP sponsors can navigate the rules to ensure their NDCP comply with Code Section 409A with respect to changes in the form of payment elections.

Webinar focuses on benefits and compensation management for healthcare workers during pandemic

In this Milliman webinar, consultants Lauren Busey, Heidi tenBroek, and Larry Daniels discuss results from the recent Milliman Northwest Healthcare COVID-19 Pulse Survey. The survey summarizes key actions local healthcare employers are taking to address employee benefits and compensation issues as a result of the current pandemic.

For more perspective on the survey, read Lauren’s article “Managing benefits and compensation for healthcare workers in the time of COVID-19.”

Human capital due diligence plan key during M&A transactions

An acquiring entity must accurately assess the advantages and disadvantages of a target company’s human capital to negotiate a good value. A thorough human capital due diligence process takes into account key talent capabilities, compensation, benefit plans, human resources (HR) policies, and more.

Milliman’s Radhika Philip and Danny Quant explore the due diligence process in their article “Human Capital Due Diligence in a Merger or Acquisition.” Their article focuses on three topics companies need to consider during the process related to key talent:

  • Assessing contractual obligations
  • Identifying key high-performing talent
  • Designing retention and termination packages.

Estimated cost of retiree pension risk transfer drops significantly, from 105.5% to 103.9% in May

Milliman today announced the latest results of its new 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. The MPBI uses the FTSE Above Median AA Curve, along with annuity purchase composite interest rates from insurers, to estimate the average cost of a PRT annuity de-risking strategy.

During May, the estimated cost to transfer retiree pension risk to an insurer dropped significantly from 105.5% of a plan’s total liabilities to 103.9% of those liabilities. This means the estimated retiree PRT cost for the month is now 3.9% more than those plans’ retiree accumulated benefit obligation (ABO). Discount rates in May dropped 27 basis points compared to a 10 basis point drop for annuity purchase rates, resulting in the relative cost of annuities decreasing by almost two percentage points.

We’ve seen a continuous drop in rates in May. However, the drop in annuity rates isn’t as steep as the decline in discount rates. We may see an uptick in PRT deals for the month given the improvement in retiree buyout costs.

Plan sponsors should note that the MPBI is an average cost estimate, and individual plan annuity buyouts can vary based on plan size, complexity, and competitive landscape. Furthermore, specific characteristics in plan design or participant population can affect the cost of a pension risk transfer.

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