Tag Archives: Alan Perry

After the election: What’s ahead for corporate pension liabilities and funded status?

vaag_m_vanessaperry_h_alanNow that the presidential election is behind us, much of the political uncertainty that existed prior to the election has subsided, but uncertainty about the investment markets remains high. Interest rates spiked upward after the election and have continued moving higher. U.S. equity prices also spiked upward and have continued climbing. Now that we’re into December, plan sponsors are trying to gauge the impact of these recent events on end-of-year pension plan assets and liabilities. The longer-term impact of the Trump victory, however, is more difficult to predict.

President-elect Trump’s plans for corporate tax cuts, infrastructure spending, and deregulation are cited as some of the factors driving interest rates and expected inflation higher. The yield on the 10-year U.S. Treasury bond has increased about 50 basis points (0.50%) since the election, while the yield on the 10-year U.S. Treasury Inflation-Protected (TIP) bond has increased about 30 basis points (0.30%). The difference between the two yields, known as “breakeven inflation,” is a measure of inflation expectations. By this measure, expected average inflation over the next 10 years has increased by about 20 basis points (0.20%) since the election.

High-quality corporate bond yields—the basis for pension discount rates for accounting disclosure purposes—have increased by about 35 basis points (0.35%) since the election. If these yields remain at this level through the end of the year, plan sponsors could benefit from a drop of several percentage points in the value of their pension obligations (since the election), although yields are still below where they were at year-end 2015.

The Federal Open Market Committee (FOMC) is widely expected to raise its federal funds target interest rate when it meets this week. This would be the first increase since December 2015. It’s too early to predict whether this will be a single increase or the first of many increases over the next couple of years. If the Fed raises its target rate several more times, this could help support the recent spike in longer rates and possibly contribute to additional increases.

Continue reading

Milliman Hangout: 2016 Pension Funding Study

The 100 largest U.S. corporate pension plans experienced a minuscule funding improvement of 0.1% in 2015, according to the Milliman 2016 Pension Funding Study (PFS). The aggregate funded ratio increased from 81.7% to 81.8% based on a $75.8 billion decrease in the market value of plan assets and a $94.5 billion decrease in the projected benefit obligation (PBO). This resulted in an $18.7 billion improvement in funded status.

In this Milliman Hangout, PFS coauthor Zorast Wadia discusses the results of the study with Amy Resnick, editor of Pensions & Investments.

To read the entire study, click here.

Milliman Hangout: 2015 Pension Funding Study

The funded status of the largest 100 corporate defined benefit plans declined by $131.3 billion in 2014 as measured by the 2015 Milliman 100 Pension Funding Study (PFS). Plan liability increases overwhelmed robust asset investment gains and annual contributions declined to $39.8 billion from $44.2 billion in 2013. PFS coauthors John Ehrhardt and Zorast Wadia discuss the results of the study with Amy Resnick, executive editor of Pensions & Investments, in this Milliman Hangout.

To read Pensions & Investments’ coverage of the study, click here.
To download the 2015 Milliman 100 Pension Funding Study, click here.

Discount rates deepen pension funding deficit and make 2014 a banner year for liability-driven investing

Ehrhardt-JohnMilliman today released the results of its 2015 Pension Funding Study, which analyzes the 100 largest U.S. corporate pension plans. In 2014, these pension plans experienced a funded status decline despite a 10.9% investment return, with plan liabilities for these 100 plans increasing by $189.2 billion and assets increasing by $57.9 billion. This resulted in a $131.3 billion increase in the funded status deficit, representing a funding ratio decline of 6.1%.

Pension plan sponsors may be feeling whiplash after the last three years. In 2012, plans with the heaviest investment in fixed income experienced superior returns. In 2013, we saw the opposite: Plans with heavy equity allocations fared the best. Now with these latest results, we’ve again reversed ourselves, as plans with the highest fixed income allocation once again outpaced the field despite a strong year for equities. This whiplash is the result of discount rates that hit a record low this year, and continue to define pension funding status.

Study highlights include:

Asset allocations shift toward fixed income. Equity allocations in the pension portfolios dropped to 37.3% by the end of 2014, the lowest in the 15-year history of this study. The companies included in this study have generally shifted toward higher allocations in fixed income investments.

Risk transfer trend continues. Some plan sponsors engaged in pension risk transfer activities, including two well-publicized pension buyouts conducted for two of the Milliman 100 companies (Bristol-Myers Squibb and Motorola).

New mortality assumptions increase pension liabilities by 3.4%. The magnitude of these increases is contingent on age, gender, and other demographic characteristics of each plan’s participants. Based on the footnote disclosures at year-end 2014, the new Society of Actuaries mortality tables led companies to update mortality assumptions, increasing pension liabilities by approximately $38.3 billion, or 3.4%, at least among those plans that disclosed the impact.

Contributions decline during 2014. The $39.8 billion in contributions during 2014 were the lowest level since 2008 and marked a $4.4 billion decrease from 2013 contribution levels. The lower-than-expected contributions were likely due to plan sponsors changing their contribution strategies in light of the Highway and Transportation Funding Act of 2014 (HATFA) interest rate stabilization legislation, enacted in August 2014.

Pension expense increases. Robust investment gains in 2013 were partially offset by the impact of lower contributions and increasing discount rates during 2013, producing a net increase of $4.8 billion and resulting in a total of $37.1 billion in pension expense. Pension expense hit an all-time high at $56.1 billion in 2012.

What to expect in 2015. The passage of HATFA may result in lower contributions on par with those seen in 2014. However, for plans already engaged in liability-driven investing (LDI), higher contribution levels can be expected. The lower discount rates at the end of 2014 are expected to lead to significant 2015 pension expense increases because discount rates for the coming fiscal year are set at the start of the fiscal year. This does not factor in any possible plan de-risking activity.