Corporate pension funding inches up in June despite low interest rate environment

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In June, these pensions experienced a $1 billion increase in funded status, as superior asset growth was able to offset rising pension liabilities due to a decrease in the benchmark corporate bond interest rates used to value those liabilities.

June’s solid 2.82% investment return raised the Milliman 100 PFI asset value by $38 billion, which more than made up for investment losses experienced in May and continues the upward march of asset returns seen during most of 2019. However, with the monthly discount rate falling to 3.45%, the lowest it’s been in nearly three years, PFI liabilities increased as well, by $37 million. As a result, the Milliman 100 PFI funding changed only incrementally: the funded ratio inched up from 87.7% at the end of May to 88.0% as of June 30.

The low discount-rate environment – the likes of which we haven’t seen since September 2016 – would spell a lot more trouble for corporate pensions if it weren’t for 2019’s overall asset gains. In fact, three years ago the PFI deficit was nearly double what it is today. Investment returns for 2019 have exceeded expectations in every month of the year except May; if discount rates increase in the second half of the year, this could be a truly favorable year for corporate pensions.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.75% by the end of 2019 and 4.35% by the end of 2020) and asset gains (10.6% annual returns), the funded ratio would climb to 95% by the end of 2019 and 111% by the end of 2020.  Under a pessimistic forecast (3.15% discount rate at the end of 2019 and 2.55% by the end of 2020 and 2.6% annual returns), the funded ratio would decline to 85% by the end of 2019 and 78% by the end of 2020.

To view the complete Pension Funding Index, click here. To see the 2019 Milliman 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 issued on making miscellaneous corrections, clarifications, and improvements
The Pension Benefit Guaranty Corporation (PBGC) released a proposed rule concerning the making miscellaneous corrections, clarifications, and improvements to its regulations on reportable events and certain other notification requirements, annual financial and actuarial information reporting, termination of single-employer plans, and premium rates.

For more information, click here.

Milliman FRM Insight: May 2019 Market Commentary

After a record-setting first four months of 2019, the S&P Global 1200 Index gave back nearly half its year-to-date (YTD) return in May’s decline. The volatility of the S&P 500 began the month below the 18% volatility threshold of the S&P 500 Managed Risk Index and remained below it the entire month. After rising 35% during the first four months of 2019, the price of oil fell 5% in May as trade wars obscured the path to global economic growth. The most recent Consumer Price Index (CPI) data show annual inflation climbed to 2%. While realized inflation moved higher, inflation expectations fell by nearly 30 basis points in May.

Milliman’s Joe Becker offers more perspective in this month’s market commentary. Download the full commentary at MRIC.com.

How can employers communicate effectively to different generations?

What constitutes effective HR communication for Millennials, Gen-Xers, and Boomers today? In the latest episode of Critical Point, Milliman’s Heidi tenBroek and Jill Godschall discuss how generational differences, behavioral economics, and technology are driving change in the HR communications space.

To listen to the entire podcast, click here. Also, to hear past Critical Point episodes, click here.

Regulatory roundup

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

Committee advances the Rehabilitation for Multiemployer Pensions Act

The U.S. House of Representative’s Committee on Education and Labor advanced the Rehabilitation for Multiemployer Pensions Act (H.R. 397). The bill aims to help prevent the imminent catastrophic collapse of the multiemployer pension crisis while protecting retirees’ benefits and saving taxpayers billions of dollars.

For more information, click here.

Final rule on electronic filing of notices for apprenticeship and training plans and statements for “top hat” plans issued

The U.S. Department of Labor (DoL) released final regulations that revise the procedures for filing apprenticeship and training plan notices and “top hat” plan statements with the Secretary of DoL. The final regulations require electronic submission of these notices and statements, as opposed to paper filings. The final regulations will make filing these notices and statements easier and lower regulatory burdens on these plans. They will also enable the DoL to make reported data more readily available to participants and beneficiaries and other interested members of the public than in the past.

For more information, click here.

Corporate pension funding plummets by $65 billion in May

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In May, these pensions experienced a $65 billion decrease in funded status, a precipitous drop that resulted from poor investment returns and a decrease in the benchmark corporate bond interest rates used to value pension liabilities. May saw a negative 0.74% investment return, resulting in a $15 billion decrease to the market value of assets for PFI plans. Discount rates also dropped in May, declining 24 basis points from 3.85% at the end of April to 3.61% as of May 31. Pension liabilities grew by $50 billion as a result. The funding ratio of the Milliman 100 PFI during May plummeted from 91.4% down to 87.9%.

May was a dismal month for corporate pensions, hitting plans with a double-whammy of poor equity returns and declining discount rates. In fact, May’s heavy losses bring pension funding lower than where it was at the start of 2019, and mark the third-largest monthly funding decline in the past five years. Only January 2015 (at $97 billion) and December 2018 (at $70 billion) had worse outcomes.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.96% by the end of 2019 and 4.56% by the end of 2020) and asset gains (10.6% annual returns), the funded ratio would climb to 96% by the end of 2019 and 111% by the end of 2020.  Under a pessimistic forecast (3.26% discount rate at the end of 2019 and 2.66% by the end of 2020 and 2.6% annual returns), the funded ratio would decline to 84% by the end of 2019 and 77% by the end of 2020.

To view the complete Pension Funding Index, click here. To see the 2019 Milliman Pension Funding Study, click here.

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