Category Archives: Defined benefit

Corporate pension funding drops by $3 billion in August

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In August, these pensions experienced a $3 billion drop in funded status due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. The monthly discount rate fell six basis points from 4.11% in July to 4.05% as of August 31. The projected benefit obligation (PBO) for these plans increased by $12 billion during this time period, while the market value of assets rose by $9 billion thanks to August’s strong investment gains of 0.85%. The funding ratio for the Milliman 100 PFI dipped slightly during the month from 93.5% to 93.3%.

The last time we saw the PFI funding ratio remain over 90% for eight months in a row was during 2008– directly preceding the financial market collapse. Investment gains continue to buoy corporate pensions despite the continued low discount rate environment.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.25% by the end of 2018 and 4.85% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 98% by the end of 2018 and 114% by the end of 2019. Under a pessimistic forecast (3.85% discount rate at the end of 2018 and 3.25% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 91% by the end of 2018 and 84% 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.

Pension studies present a global picture of defined benefit plans

Milliman’s MBW International counterpart, Barnett Waddingham, recently published a report focusing on the corporate pension funding status for plans in the United Kingdom. The report is comparable to the Milliman Pension Funding Study, which covers the 100 largest U.S. corporate plan sponsors. In this article, Milliman’s Zorast Wadia and Barnett Waddingham’s Andrew Vaughan and Lewys Curteis explore the similarities of the two reports.

Co-sourcing versus outsourcing pension plan administration

Pension plan administration can be managed through a variety of arrangements. These arrangements include insourced, where a plan sponsor performs the entire administration internally; co-sourced, where the plan sponsor contracts with an outside vendor to have a portion of the plan administration done externally; and outsourced, where the outside vendor performs the entire administration.

As insourcing has become less common, plan sponsors are turning to outside vendors to co-source and outsource the administration. Both arrangements have advantages and disadvantages. Co-sourcing combines the positive elements of both insourcing and outsourcing, allowing the plan sponsor to maintain control of the administration while using the resources and expertise of an outsourced vendor. Outsourcing removes the burden and complexity of plan administration entirely.

Which is better? When do the advantages of outsourcing outweigh those of co-sourcing? What can businesses do to ensure that pension plan administration is accurate, efficient, and cost-effective? In this article, Milliman’s Julie Sinke explores these questions.

July’s corporate pension funding ratio reaches 93.4%, highest in a decade

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In July, these pensions experienced a $12 billion increase in funded status due to robust investment returns of 1.15% for the month. Assets increased by $13 billion in July, with the PFI deficit falling from $120 billion to $108 billion, while pension liabilities increased by $1 billion due to a slight dip in the benchmark corporate bond interest rates used to value pension liabilities. The funded ratio climbed from 92.7% at the end of June to 93.4% as of July 31, the highest it’s been in a decade.

Corporate pension funding ratios are back at percentages we saw before the global financial crisis, though 10 years ago discount rates were almost double what they are today. In fact, July’s strong investment returns would have had an even more pronounced impact on these plans, except for the fact that a majority of the Milliman 100 companies have heavy fixed income concentrations.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.36% by the end of 2018 and 4.96% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 99% by the end of 2018 and 115% by the end of 2019. Under a pessimistic forecast (3.86% discount rate at the end of 2018 and 3.26% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 91% by the end of 2018 and 84% 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.

Lackluster asset performance in Q2 drops public pension funding by $23 billion

Milliman has released the 2018 second quarter (Q2) results of its Public Pension Funding Index (PPFI), which consists of the nation’s 100 largest public defined benefit pension plans. In Q2, these plans experienced a $23 billion loss in funding, largely due to a lackluster asset performance of 0.70% in aggregate. The plans earned approximately $45 billion for the quarter, below assumed investment returns reflected in liability calculations. This shortfall is exacerbated by $28 billion flowing out of the plans, as benefits paid out exceeded contributions coming in from employers and plan members. The PPFI funding ratio dipped slightly from 71.4% in Q1 2018 to 71.2% in Q2.

Without the strong investment performance we saw in 2017, it’s difficult for these public pension plans to gain ground. If a plan’s benefits paid out exceed contributions coming in, reliance on the market is even more crucial to buttress funding.

As of June 30, 2018, the PPFI deficit stands at $1.448 trillion, the largest since the index began in September 2016. The total pension liability (TPL) topped the $5 trillion mark for the first time in Q2, at an estimated $5.025 trillion at the end of the quarter, up from $4.985 trillion at the end of Q1. Funded ratios did not move much this quarter, with one more plan dropping below the 90% funded mark; there are now just 14 plans above this mark, 26 plans whose funded ratios fall below 60%, and 11 plans 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.

Designing a pension plan de-risking strategy

Milliman consultants helped one client prepare a strategic and practical strategy to de-risk its defined benefit (DB) pension plan. The consultants began discussions by explaining how the path to de-risking included a wide spectrum of options ranging from risk retention via modified plan design to third-party risk transfer. The advantages and disadvantages including costs associated with several de-risking options were also discussed. The client’s decision would depend on its risk tolerance and willingness to incur additional short-term costs. Milliman’s Zorast Wadia explains how the firm helped the client meet its overall business objective in his case study “De-risking: Options available to reduce your pension plan footprint.”