Category Archives: Defined benefit

Declining discount rates drive corporate funded status down by $10 billion in April

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Despite strong investment returns of 0.84%, in April the deficit for these pension plans increased from $247 billion to $257 billion, the result of a decrease in the benchmark corporate bond rates used to value pension liabilities. The funded ratio for these pensions fell from 85.3% to 84.9% over the same time period.

Tracking these pensions lately has been like watching a game of ping pong. Robust investment returns are in a rally with interest rates, and in this metaphor we’re all waiting on interest rates to advance the game.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.28% by the end of 2017 and 4.88% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 93% by the end of 2017 and 107% by the end of 2018. Under a pessimistic forecast (3.48% discount rate at the end of 2017 and 2.88% 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 receive regular updates of Milliman’s pension funding analysis, contact us here.

Public pensions regain ground lost in Q4, experience $78 billion improvement in funded status

Milliman has released the first quarter results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q1 2017, the funded ratio of these plans regained ground lost at the end of last year, climbing from 70.1% at the end of December to 72.0% as of March 31, 2017. These plans saw their funded status improve by $78 billion for the quarter, the result of strong investment returns (measuring 4.29% in aggregate) that led public plan asset growth to outpace the rise in pension liabilities.

Thanks to robust market performance in Q1, the funded ratios for our Milliman 100 plans improved across the board, with five additional pensions crossing the 90% funded mark. And while quarterly investment returns dwarfed those of Q4, the wide range in performance–from a low of 2.12% to a high of 5.06%–highlights the challenge that lies ahead for many poorly funded plans.

Of the Milliman 100 plans, 15 have funded ratios above 90%, 64 have funded ratios between 60% and 90%, and 21 have funded ratios lower than 60%. The Milliman 100 PPFI total pension liability (TPL) increased from $4.659 trillion at the end of Q4 to an estimated $4.698 trillion at the end of Q1. The TPL is expected to grow modestly over time as interest on the TPL and the accrual of new benefits outpaces the benefits paid to retirees.

To view the Milliman 100 Public Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

Administrative tips for lump-sum window offerings

Lump-sum windows can present a “win-win” scenario for both defined benefit (DB) pension plan sponsors and participants. Sponsors can decrease their PBGC premiums by reducing the amount of participants within a plan. On the other side, participants in need of cash can benefit from a lump-sum payout.

Before implementing a lump-sum window sponsors must first consider the various administrative aspects related to such an offering. The DB digest article “Lump-sum windows: Administrative tips to consider” by Nicholas Pieper highlights these nine administrative tips that can help plan sponsors with the process.

• Identify the eligible population
• Clean up the data
• Seek legal counsel assistance
• Determine the duration of your window
• Set a manageable deadline
• Deliver an announcement mailing
• Anticipate participant inquiries
• Create the ultimate lump-sum window packet
• Prepare for special circumstances

To learn more about lump-sum windows, click here.

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.

Despite robust investment returns, 100 largest U.S. corporate pension plans saw their funded status decrease by $21.7 billion in 2016

Milliman has released the results of its 2017 Pension Funding Study, which analyzes the largest corporate pension plans sponsored by 100 U.S. public companies. In 2016, these pension plans experienced a $21.7 billion decrease in funded status, the result of a $54.0 billion increase in the projected benefit obligation (PBO) that was only partially offset by a $32.3 billion increase in the market value of plan assets. As a result, these Milliman 100 plans finished off the year with a funded ratio of 81.2%, down from 81.9% the year before. But the $21.7 billion deterioration and incremental drop in funded status mask a year that experienced volatility across the board for pension plans.

The last year was quite the tug-of-war for these pension plans. Investment performance exceeded expectations, with the 100 largest U.S. pensions experiencing returns of 8.4%—compare that with 0.8% the year prior. But the volatile interest rate environment saw the discount rate plummet by 30 basis points. In 2016, these dynamics resulted in a funded ratio that oscillated back and forth for most of the year before the postelection bump. The end result was a funded ratio of 81.2%—not that far off from where we’ve been at the end of 2015 and 2014.

Study highlights include:

Analysis of asset gains. The 8.4% investment returns experienced by these pension plans was well above the 7.0% return expectation set for 2016. Meanwhile employers’ 2016 plan contributions were up 38% from the year prior. One possible reason for the higher plan contributions is that they improve funded status, resulting in lower Pension Benefit Guaranty Corporation (PBGC) premium expenses.

Impact of updated mortality assumptions. Further decreases in future life expectancy for the second year in a row result in significant reductions in projected benefit obligation (PBO) for several Milliman 100 companies.

Use of spot rates increases by 24%. Forty-six of the largest 100 plan sponsor companies will consider recording the fiscal year 2017 pension expense using an accounting method change linked to the spot interest rates derived from yield curves of high-quality corporate bonds. The move to spot rates will result in pension expense savings.

Pension risk transfers continue. The estimated sum of pension risk transfers to insurance companies (“pension lift-outs”) and settlement payments increased from $11.6 billion in FY2015 to $13.6 billion in FY2016.

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