Category Archives: Defined benefit

Corporate pension funding increases by $23 billion in June as discount rates hit two-year high

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 $23 billion increase in funded status, with the deficit of the Milliman 100 PFI plans falling from $141 billion at the end of May to $118 billion as of June 30. The improvement was due to an increase in the benchmark corporate bond interest rates used to value pension liabilities, which saw discount rates increase by 13 basis points from 3.99% to 4.12% over the same time period. The funded ratio for the Milliman 100 PFI jumped to 92.8% as of June 30, and would have been higher had it not been for June’s poor investment returns of -0.09%.

Six months into 2018 and corporate pensions are well ahead of where they started at the beginning of the year. The rise in discount rates has helped these pensions stay on track, with June marking the highest rate since January 2016 and the Milliman 100 funding ratio climbing from 87.6% to 92.8% for the first half of the year. This is despite investment performance falling short of expectations so far in 2018.

June’s -0.09% investment return left Milliman 100 PFI asset value to decline from $1.531 trillion at the end of May to $1.526 trillion as of June 30. By comparison, the 2018 Milliman Pension Funding Study reported that the monthly median expected investment return during 2017 was 0.55% (6.8% annualized). The projected benefit obligation (PBO) decreased by $28 billion during June, lowering the Milliman 100 PFI value to $1.644 trillion.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.42% by the end of 2018 and 5.02% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 100% by the end of 2018 and 116% by the end of 2019. Under a pessimistic forecast (3.82% discount rate at the end of 2018 and 3.22% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 89% by the end of 2018 and 83% by the end of 2019.

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

Corporate pension funded status dips by $2 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 $2 billion dip in funded status as investment gains mostly offset a four-point decrease in the monthly discount rate. The funded ratio for the Milliman 100 PFI remains unchanged at 91.6% as of May 31.

Sometimes no news is good news for corporate pensions. May’s 0.73% investment gain exceeded monthly expectations, and helped balance out the month’s modest decrease in corporate bond rates.

From April 30, 2018, through May 31, Milliman 100 PFI plans experienced a $7 billion increase in asset values, while the projected benefit obligation (PBO) rose by $9 billion. As a result, the deficit increased from $139 billion to $141 billion for the month. Over the last year (June 2017 to May 2018), the Milliman 100 PFI funded status deficit has improved by $116 billion.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.34% by the end of 2018 and 5.03% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 100% by the end of 2018 and 116% by the end of 2019. Under a pessimistic forecast (3.64% discount rate at the end of 2018 and 3.03% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2018 and 81% by the end of 2019.

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

Corporate pensions’ funded ratio rises to 91.6% despite investment losses in April

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In April, these pensions experienced a $20 billion improvement in funded status thanks to an increase in the corporate bond rates used to measure pension liabilities. From March 31, 2018, through April 30, the monthly discount rate increased 12 basis points, from 3.91% to 4.03%; as a result, pension liabilities decreased by $26 billion for the month. The funded ratio for the PFI plans increased from 90.6% to 91.6%, despite a 0.11% investment loss that reduced index assets by $6 billion.

Corporate pensions continue to get some discount rate relief in 2018, despite volatile equity markets. Over the past 12 months, with the rise in rates and a 6.17% cumulative asset gain for these plans, we’ve seen the funded ratio climb from 85.5% to 91.6%.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.43% by the end of 2018 and 5.03% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 101% by the end of 2018 and 117% by the end of 2019. Under a pessimistic forecast (3.63% discount rate at the end of 2018 and 3.03% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2018 and 81% by the end of 2019.

To view the complete Pension Funding Index, click here. This May PFI publication reflects the annual update of the Milliman 100 companies and their latest financial disclosures. To see the 2018 Milliman Pension Funding Study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

What must pension administrators consider to correct plan errors?

In defined benefit (DB) plan administration, errors can occur in following the provisions of the plan document, applying regulatory guidelines, or processing plan data. DB plan administration errors, or failures, can have serious consequences, including disqualification. Fortunately, the Internal Revenue Service has established programs for correcting errors in a relatively easy manner.

Failure to administer a plan in accordance with the plan document and applicable regulations can result in severe tax consequences. If a plan is disqualified, the plan’s trust loses its tax-exempt status and this affects the plan sponsor’s ability to deduct plan contributions. Additionally, contributions are subject to Social Security, Medicare, and federal unemployment taxes and trust earnings are subject to income tax. Plan distributions are no longer eligible for rollover to another eligible retirement plan or IRA.

In order to correct plan failures completely, you must start with a plan. In this article, Milliman’s Mary Hart discusses several ways to correct plan errors.

Public pension funding falls back to 71.4% in the first quarter of 2018

Milliman has released the 2018 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, these plans experienced a $93 billion loss in funding, largely resulting from volatile equity markets that produced an aggregate -0.75% investment return for these plans. In comparison, the PPFI investment return for 2017 Q4 was 3.24%. From January 1, 2018, to March 31, 2018, the PPFI pensions saw their funded status drop from 73.1% to 71.4%.

After more than a year of running smoothly, the market stubbed its toe in Q1. As a result, much of last year’s robust pension funding gains were washed away in early 2018.

No plans in our index seem to have made it through the first quarter of 2018 unscathed, with estimated returns ranging from a low of -1.91% to a high of -0.03%; the Milliman 100 PPFI deficit grew from $1.332 trillion to $1.425 trillion during Q1. The losses resulted in six plans dropping below the 90% funded mark, with 15 plans now over 90% funded, down from 21 as of 2017 Q4. At the other end of the spectrum, 26 of the 100 plans now have funded ratios below 60%, with 10 plans that remain below 40% funded.

To view the Milliman 100 Public Pension Funding Index, click here.

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

Healthy multiemployer pension plans achieve best funding in a decade, but unhealthy plans continue to languish

Milliman today released the results of its Spring 2018 Multiemployer Pension Funding Study (MPFS), which analyzes the funded status of all multiemployer pension plans in the United States. As of December 31, 2017, the plans achieved an aggregate funded ratio of 83%, the highest since the market collapse in 2008; a decade ago, the aggregate funded ratio of all multiemployer plans stood at 85%.

While increases in plan contributions and reductions in benefits factored into these plans’ funding improvement, stellar investment returns were the primary driver of gains for the MPFS plans. The estimated 2017 calendar year investment return for our simplified portfolio was nearly 16%—more than double the assumption of most plans. Critical plans, however, were unable to capitalize on the sturdy investment returns due to the cash flow demands that hit less healthy plans.

While healthier plans benefited from better than assumed investment earnings, critical plans are sinking in quicksand and not able to benefit enough from strong investment returns. It’s been almost 10 years since the global financial crisis, and while healthier plans have gotten their funded status levels back to where they were then, critical plans have not.

Healthy plans have a funded ratio of 93%, compared with 90% a decade ago. Critical plans’ aggregate funded ratio as of year-end is mired at 60%, compared to 76% in 2008. A closer look at critical plans in the “red” or “deep red” zones show the contributions of mature plans (those with fewer active participants) are relatively small compared to the size of the plan’s assets and liabilities. The shortfall for red zone and deep red zone plans is expected to grow unless these plans experience superior asset returns, increased contributions, and/or benefit reductions.

To view the complete study, click here.

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