Category Archives: Defined benefit

Corporate pensions experience back-to-back monthly gains with $7 billion improvement in October

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In October, these pensions’ funded status experienced a $7 billion uptick, increasing for the second month in a row and bringing the total funded status gain to $32 billion since August 31. October’s improvement was the result of robust 1.19% investment returns, which saw the Milliman PFI plans’ funded ratio climb to 84.7% for the month. Cumulative investment gains in 2017 are 9.57% year-to-date; by comparison, the 2017 Milliman Pension Funding Study reported that the monthly median expected investment return during 2016 was 0.57% (7.0% annualized).

While October’s investment returns are well above expectations, funded status gains were partially offset by the continued low discount rate environment. It will be interesting to see what, if any, changes are in store to interest rate strategy with the nomination of a new Fed chair.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.76% by the end of 2017 and 4.36% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 87% by the end of 2017 and 100% by the end of 2018. Under a pessimistic forecast (3.56% discount rate at the end of 2017 and 2.96% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 84% by the end of 2017 and 77% 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.

One-third of 100 largest public pensions reduced interest rate assumptions in latest reported fiscal year

Milliman today released the results of its 2017 Public Pension Funding Study (PPFS), which analyzes funding levels of the nation’s 100 largest public pension plans, including an independent assessment on the expected real return of each plan’s investments.

As of June 30, 2017, the estimated aggregate funded ratio of the nation’s largest public pension plans is 70.7%, up from 67.7% at the end of the plans’ latest reported fiscal years (generally June 30, 2016). Total assets for these plans at their fiscal year-ends were reported at $3.19 trillion, and as of June 30, 2017, are estimated to have jumped to a combined $3.44 trillion thanks to strong market performance in late 2016 and early 2017. As for Total Pension Liability (TPL), the Milliman 100 public plans reported at their latest fiscal year-ends an aggregate TPL of $4.72 trillion, covering more than 26 million members; this figure is estimated to have risen to $4.87 trillion as of June 30, 2017.

An in-depth analysis by Milliman, however, estimates these plans’ total liabilities could be even higher. Based on the market’s consensus views that long-term investment returns have been declining, the study recalibrated TPL for each plan using independently determined interest rate assumptions. For this study, we use the term “interest rate” to indicate the assumption the plan sponsor has chosen to determine contribution amounts, and the term “discount rate” to indicate the rate used to measure liabilities for financial reporting purposes. In aggregate, Milliman estimates the recalibrated TPL for the Milliman 100 plans is $4.98 trillion as of their fiscal year-ends–$260 billion higher than reported by sponsors.

In this low-interest-rate environment, market expectations on investment returns have been falling faster than plan sponsors can reassess rates. And the gap that creates between sponsor-reported and our recalibrated market-based liabilities is widening, which is all the more reason plans should continue to monitor emerging investment return expectations and adjust their assumptions as needed.

While plan sponsors report a median discount rate of 7.50% (with a spread of 6.50% to 8.50%), Milliman’s assessment of the expected real return for each plan’s investments puts the median rate at 6.71%-lower than all but six of the 100 sponsor-reported rates. Despite one-third of the plans lowering their discount rates since the last study, this gap between sponsor-reported and independently determined rates continues to widen, indicating that further reductions in discount rates will be likely in the coming years.

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

Updated mortality tables for DB plan lump-sum payments starting in 2018

As expected, the Internal Revenue Service (IRS) has issued updated mortality tables for lump-sum payments paid in plan years beginning in 2018 for defined benefit (DB) pension plans. The use of the new mortality table in 2018 will increase the value of the lump-sum payment to participants by approximately 4% to 5%, depending on the age of the participant on the date of the lump-sum payment. This new lump-sum mortality table is mandatory and cannot be delayed for lump sums paid in 2018.

Although the new mortality table increases lump sums, the 2018 lump-sum interest rates may cause the lump sum value to go up or down. The lump-sum interest rates are also published by the IRS. They are based on three segment rates. The lump sum value is derived by discounting the actual monthly benefit payments at the appropriate segment rate back to the benefit commencement date. Under IRS rules, a plan may have up to a five-month lookback when establishing the lump-sum segment rates used for lump sums paid in a plan year.

The September 2017 rates that will be used for the 2018 lump-sum payments are just slightly higher than the September 2016 rates. We do not yet have the October, November, and December 2017 segment rates, but note that September 2016 reflected the lowest segment rates for lump-sum payments in 2017. So far in 2017, the segment rates have all been lower than the December 2016 segment rates. Lower interest rates translate to higher lump sum values because the monthly benefit payments are discounted at a lower interest rate.

Even with possibly higher lump sum values in 2018, depending on interest rates, it may still be beneficial to look at lump-sum windows in DB pension plans. This is due to increasing Pension Benefit Guaranty Corporation (PBGC) premiums which are indexed each year. In 2017, single-employer PBGC premiums were $69 per participant and $34 per $1,000 of unfunded vested benefits. For 2018, single-employer PBGC premiums will be $74 per participant and $38 per $1,000 of unfunded vested benefits. This is an increase of approximately 7% in the per participant PBGC flat-rate premium and an increase of approximately 12% in the PBGC variable rate premium. Thus, especially for small vested terminated benefits, the cost of a lump-sum window may be less than the present value of the PBGC premiums. Also, annuity purchase rates continue to be low, so again the cost of a lump sum window may be less than buying annuities for vested participants that have left the employer. For both of these reasons, 2018 may be a good time to explore lump-sum windows.

Multiemployer pension plans nearing healthiest funding since market collapse of 2008

Milliman has released the results of its Fall 2017 Multiemployer Pension Funding Study, which analyzes the funded status of all multiemployer pension plans. As of June 30, 2017, these plans are nearing the healthiest they’ve been since U.S. financial markets collapsed in 2008. In the first six months of 2017, the aggregate funding percentage for all multiemployer pensions climbed from 77% to 81%, reducing the system’s shortfall by $21 billion—an improvement driven largely by favorable investment returns.

In aggregate, asset growth for multiemployer plans far outpaced assumptions for the first half of 2017. But that bears little weight for critical plans, which are hurt by their substantially lower asset bases. Despite the bull market, we’re seeing the funding gap continue to widen between critical and noncritical plans.

While noncritical plans are nearing an aggregate funded percentage of 90%, the funding level for critical plans remains around 60%. Currently about a quarter of the plans tracked by Milliman’s Multiemployer Study fall within critical levels, with some of the most troubled on track to rely on assistance from the Pension Benefit Guaranty Corporation (PBGC)—which itself is facing severe financial challenges. Comparatively, of the approximately 1,250 plans analyzed in the study, around 75% are considered noncritical.

To view the complete study, click here.

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

Corporate pensions experience largest gains of the year in September

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In September, these pension plans experienced their largest improvement year-to-date, with a $26 billion increase in funded status. The improvement was the result of a nine-basis-point increase in discount rates coupled with market value gains, which saw the Milliman PFI plans’ funded ratio climb from 83.0% to 84.3% for the month.

While September’s positive performance is welcome news for these pensions, it’s tempered somewhat by the recent release of the new mortality tables by the Internal Revenue Service (IRS). Much of the fourth quarter will be spent in anticipation of how the new regulation will affect 2018 cash contribution funding, Pension Benefit Guaranty Corporation (PBGC) premiums, and de-risking efforts.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.84% by the end of 2017 and 4.44% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 87% by the end of 2017 and 101% by the end of 2018. Under a pessimistic forecast (3.54% discount rate at the end of 2017 and 2.94% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 83% by the end of 2017 and 76% by the end of 2018.

To view the complete Pension Funding Index, click here. Also, to see the 2017 Milliman Pension Funding Study, click here.

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

Knowing participants’ profiles is becoming increasingly important

The debate about a new pension system in the Netherlands is becoming more and more complicated because of issues including solidarity, labor market flexibility, indexation security and uncertainty about the level of pension income. These subjects are complicated. The question regarding whether pension income from retirement date is high enough in relation to income received in active employment or more relevant to the spending pattern is not often mentioned in this context. The questions about how long pension is to be paid out (lifelong) and how much premium participants are willing to pay for their retirement are rarely discussed.

We suspect that one of the reasons that we find these questions so difficult to answer is because we do not really know about the (ex) participants (workers, retirees and former participants with vested pensions). As a consequence, the pension debate becomes an abstract compensation and benefits discussion focused on a complicated financing component.

Having relevant knowledge about our stakeholders could provide significant benefits. If we know and understand our participants well, then:

• Pensions, even without specific customization, could be fitted to stakeholders more appropriately.
• Choosing the most appropriate financing (in terms of risk, duration and reservation) could be ensured.

Getting knowledge and information about our pension stakeholders can be accomplished in various ways. This may include:

• The pension stakeholders ask the right questions at the right level of knowledge-estimated by using available data (such as salary level and job title)-and in understandable language
• Combining knowledge of our pension stakeholders with external data to gain more insight and to better understand their needs.

A good example is the correlation between education level and life expectancy of participants. The Dutch Central Bureau of Statistics (CBS) regularly publishes that the life expectancy of a Dutch man with a highly qualified education at the academic level is much higher than that of a man who has enjoyed a maximum of elementary school education. Milliman calculated that the remaining life expectancy at the age of 68 for the more highly educated group was more than two years greater than for the other group.

In practice, it appears that data about the training of individual participants is often not available to pension funds. If this information were adequately collected and stored in the near future, then additional analyses could be performed using this data. This contributes to the necessary knowledge and insight into the needs of our pension stakeholders. As a result, not only the expected duration of benefits can be determined, but also, by combining this data with other available data, we could estimate the individual’s income needs. The combination of data and analysis of connections between data can create even greater insight. For example, it makes a big difference whether a participant in a retirement scheme has a physically demanding occupation or a light one, whether he travels regularly or stays at home reading, and whether he maintains a healthy lifestyle or just the opposite.

Collecting knowledge about our participants and analyzing already available knowledge or information (big data) could ensure that we design better pension schemes and that their funding takes place in the most appropriate way.

Let’s start with that today. More knowledge and insight into participant profiles helps both the employer and the performer get better “demonstrable in control” information regarding their pension commitments, provisions, and HRM policies.