Tag Archives: defined benefit

Corporate pension funded status improves by $12 billion thanks to huge 5.03% investment gain for November

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans.

In November, the market value of assets for the PFI plans improved by $77 billion thanks to massive investment returns for the month. November’s 5.03% investment gain tops the whopping 4.68% return of April, putting 2020 in the record books for having two of the top 10 highest return months in the same year.

This improvement was countered by a 24-basis point decrease in the monthly discount rate, however, which saw pension liabilities increase by $65 billion. As a result, the funded status for the Milliman 100 PFI improved by only $12 billion, while the funded ratio climbed from 85.2% at the end of October to 86.2% as of November 30.

November’s market returns were the highest gains of 2020 so far. But the low discount rate environment continues to be a drag on funding, with the Milliman 100 plans down $89 billion for the year overall. It would likely take both another stellar investment month, along with a significant discount rate increase, to end the year up from 2019. 

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.12% by the end of 2021 and 3.72% by the end of 2022) and asset gains (10.5% annual returns), the funded ratio would climb to 103% by the end of 2021 and 121% by the end of 2022.  Under a pessimistic forecast (1.82% discount rate by the end of 2021 and 1.22% by the end of 2022 and 2.5% annual returns), the funded ratio would decline to 79% by the end of 2021 and 73% by the end of 2022.

To view the complete Pension Funding Index, click here. To see the 2020 Milliman Pension Funding Study, click here.

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

Multinational employers face retirement plan funding challenges amid COVID-19

Defined benefit plan sponsors face a squeeze on funding status from two directions. For one, ongoing and renewed COVID-19 lockdowns worldwide will potentially reduce the value of investments of pension fund assets as stock markets could decline as a result of closed businesses. Second, pension funds aren’t keeping pace with contributions as workers are furloughed and contributions are reduced or delayed. Correspondingly, members of defined contribution plans face similar shortfalls in the funding of their own pension pots. 

While multinational companies face the key question of how far they should go towards helping employees financially, governments worldwide have instituted various programs or measures to provide short-term relief. In this article, Milliman’s Danny Quant provides a global roundup of these measures in various countries. 

Corporate pension funded status improves by $21 billion in October

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans.

In October, the funded status of these plans improved by $21 billion, primarily due to liability gains resulting from an increase in the benchmark corporate bond interest rates used to value those liabilities. The monthly discount rate rose 14 basis points for the month, from 2.57% to 2.71%. As a result, the PFI deficit declined to $285 billion, the lowest it’s been since March 2020. At the same time, October’s investment loss of 0.93% resulted in a $20 billion decrease to the market value of assets. The funded ratio for the Milliman 100 PFI rose slightly, from 84.4% at the end of September to 85.1% as of October 31.

All eyes are on the presidential election this month, and what the results might mean for interest rates and investment returns going into year-end. As discount rates tick back up for the third consecutive month, executives should be paying close attention to market movements coming out of this election cycle.

Looking forward, under an optimistic forecast with rising interest rates (reaching 2.81% by the end of 2020 and 3.41% by the end of 2021) and asset gains (10.5% annual returns), the funded ratio would climb to 87% by the end of 2020 and 103% by the end of 2021.  Under a pessimistic forecast (2.61% discount rate by the end of 2020 and 2.01% by the end of 2021 and 2.5% annual returns), the funded ratio would decline to 84% by the end of 2020 and 77% by the end of 2021.

To view the complete Pension Funding Index, click here. To see the 2020 Milliman Pension Funding Study, click here.

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

What is a lump-sum conversion?

Defined benefit (DB) pension plans commonly distribute benefits as a monthly payment to an individual from the time of retirement until the individual’s death. This form of payment is called a single life annuity. Participants in DB plans often can choose from multiple types of annuities at retirement, but each of these options results in monthly payments. In some circumstances, benefits are distributed as a single payment rather than in monthly payments—this is known as a lump-sum distribution. This form of payment is generally permitted from plans when the “value” of the annuity is less than $5,000, an Internal Revenue Service (IRS) limit, or at higher values if the plan provides for this option.

How do you determine the “value” of an annuity in which future payments are promised for an individual’s lifetime? This determination requires the skills of an actuary and is called a lump-sum conversion. The lump sum value of an annuity may also be called the actuarial present value of the annuity.

In this article, Milliman’s Corey Swarner discusses how actuaries make these conversions by introducing the concepts of present value and expected value.

Corporate pension asset values drop in September for the first time in six months, funded ratio dips to 84.5%

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans.

In September, corporate pensions experienced an investment loss of -0.74%—a $17 billion decline in asset values—marking the first time in six months that returns have not been above-average. At the same time, the monthly discount rate climbed slightly, from 2.54% at the end of August to 2.57% as of September 30, lowering pension liabilities by $9 billion for the month. As a result, the Milliman 100 PFI funded status declined by $8 billion during September, with the funded ratio dropping slightly from 85.0% to 84.5%.

This was a dizzying few months for corporate pensions, with discount rates hitting historic lows while investment returns had equally noteworthy gains. However, the result was a solid third quarter for the Milliman 100 plans, with the funded ratio improving from 83.5% at the end of June to 84.5% as of September 30.

Looking forward, under an optimistic forecast with rising interest rates (reaching 2.72% by the end of 2020 and 3.32% by the end of 2021) and asset gains (10.5% annual returns), the funded ratio would climb to 88% by the end of 2020 and 103% by the end of 2021.  Under a pessimistic forecast (2.42% discount rate by the end of 2020 and 1.82% by the end of 2021 and 2.5% annual returns), the funded ratio would decline to 83% by the end of 2020 and 76% by the end of 2021.

To view the complete Pension Funding Index, click here. To see the 2020 Milliman Pension Funding Study, click here.

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

Dear Actuary explores the benefits of an experience study as a financial plan management tool

With financial management being a top priority of retirement plan boards, an experience study can be a vital tool for the successful financial plan management of a pension. Here are two important questions plan sponsors should consider: What is the purpose of an experience study? And what benefits can it provide my pension plan? Milliman’s latest Dear Actuary column provides some perspective.