Tag Archives: discount rates

Multiemployer pension plans experience dramatic funding swings in the first half of 2020 due to COVID-19 and market volatility

Milliman today released the results of its Multiemployer Pension Funding Study (MPFS) as of June 30, 2020, which analyzes the funded status of all multiemployer defined benefit pension plans in the United States.

As of June 30, 2020, the aggregate funded percentage of multiemployer plans dropped to 82%, down from 85% at the end of 2019, resulting in a $26 billion increase in the aggregate funding shortfall. The estimated investment return for the first half of 2020 was about -1.3%, based on a simplified portfolio.

In general, over the past 18 months, increased volatility in the markets has caused dramatic swings in the aggregate funded percentage for most plans. While all plans absorb market gains and losses over time, extreme market movements immediately prior to a plan’s measurement date can have a significant impact on its funding position and annual Pension Protection Act (PPA) zone status.

The past six months have demonstrated why measurement dates matter. As of March 31, the estimated year-to-date return on our simplified portfolio was about -13.4%. So the 70 plans in the MPFS with that year-end date will complete their annual valuations and zone certifications when 2020 asset values are at their lowest for the year so far. This will unfortunately affect their funding position and zone status, despite the current market recovery in Q2 2020.

To view the complete study, click here.

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

Multiemployer pension plans’ aggregate funding percentage reaches 85% in 2019, matching pre-financial crisis levels

Milliman today released the results of its latest Multiemployer Pension Funding Study (MPFS), which analyzes the funded status of all multiemployer defined benefit pension plans in the United States.

As of December 31, 2019, the aggregate funded percentage of multiemployer plans rose to 85%, up from 74% a year prior, due primarily to double-digit asset returns that exceeded expectations for the year. Overall, multiemployer plan funding levels are now back to where they were in 2007, before the financial crisis, with a greater percentage of plans over 100% funded compared with 12 years ago. However, the picture is much less rosy for troubled multiemployer pensions, with 104 plans now funded below 50%, compared with just 28 in 2007.

While about 130 plans continue on a path toward insolvency, the majority of non-critical plans have improved since 2007 and are at higher funding levels today. In addition to investment performance, many plans are seeing funding levels increase due to benefit and/or contribution adjustments made during the past decade.

Milliman’s most recent MPFS also explores the latest trends in the average discount rate assumption for all plans as well as what may lie ahead for multiemployer plans given potential legislation and unknown investment returns.

To view the complete study, click here.

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

PPA segment rates: Looking ahead

Kliternick-StuartBack in April, I had discussed that the process used to determine the Pension Protection Act (PPA) segment rates under the Highway and Transportation Funding Act of 2014 (HATFA) was so stable that one could predict the segment rates to be used in the next several years with strong accuracy. Using 5,000 stochastic simulations of the yield curve, assuming funding laws in effect at that time and based on Milliman’s capital market assumptions and published surveys of interest rate forecasts by economists, it appeared that the 2016 PPA segment rates were all but finalized. Those predicted segment rates match what the PPA segment rates will be in 2016: 4.43%, 5.91%, and 6.65%.

Since then, the Bipartisan Budget Act of 2015 (BBA) was signed into law on November 2. BBA extended the current corridor used as the floor and ceiling for PPA rates. The range of 90% to 110% was extended for three years through 2020, when the corridor will widen annually by 5 basis points on both sides until it reaches a range of 70% to 130% for the 2024 plan year and beyond. In addition, BBA also provided the Pension Benefit Guaranty Corporation (PBGC) flat-rate premium and the variable-rate premium percentage to be used for the next several years (subject to indexing).

In order to account for these changes, we have updated our segment rates projections for the next several years. The first table below projects for 2016 to 2019, showing the 50th percentile of the 24-month average rates (assuming a calendar-year plan with no look-back period), and a range using the 5th and 95th percentile rates as endpoints for 2016 to 2019.

Year 2016 2017 2018 2019
First Segment Rate 1.41% (1.31% – 1.53%) 1.80% (0.93% – 2.92%) 2.25% (0.48% – 4.70%) 2.66% (0.30% – 5.88%)
Second Segment Rate 3.96% (3.88% – 4.05%) 4.13% (3.40% – 4.96%) 4.49% (2.95% – 6.28%) 4.70% (2.71% – 7.14%)
Third Segment Rate 4.99% (4.92% – 5.07%) 5.16% (4.49% – 5.86%) 5.51% (4.18% – 6.96%) 5.68% (4.01% – 7.52%)

As the table indicates, interest rates are expected to rise over the next several years. Short-term rates are projected to rise by as much as 125 basis points, while mid-term and long-term rates are projected to rise by about 70 basis points.

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Milliman infographic: Pension liabilities

When the discount rate increases the projected benefit obligation (PBO), or pension liability, decreases, and vice versa. This relationship explains the volatile nature of pension liabilities and demonstrates why liabilities-driven investment strategies, which manage funded status and limit volatility of pension liabilities and asset returns, are useful.

PFI-graphic_final-screenRes_600x

To read the entire Corporate Pension Funding Study, click here.




Projected funding rates for the next several plan years

Kliternick-StuartThe assumptions actuaries use to calculate funding and accounting liabilities for defined benefit (DB) plans are in the process of undergoing revisions over the next several years. The Society of Actuaries recently released new mortality and mortality projection tables and, even though the Internal Revenue Service has yet to adopt the new mortality tables for funding purposes, several plans are using either these tables or a modification of the current standard tables when calculating their accounting disclosure liabilities. Actuarial Standards of Practice (ASOPs) will encourage actuaries to review other demographic assumptions (e.g., withdrawal) and economic assumptions, such as the consumer price index (CPI). And, as the Milliman Pension Funding Study shows, the discount rates used for accounting purposes have fluctuated.

However, because of recent law changes made by the Moving Ahead for Progress in the 21st Century Act (MAP-21) and the Highway and Transportation Funding Act of 2014 (HATFA), pension funding discount rates for plans that use segmented interest rates have been relatively stable for the past several years. In fact, the process used to determine the segment rates under HATFA is so stable that, absent additional funding rules changes, one can predict with reasonable accuracy the segment rates to be used for funding valuations for the next several plan years.

As an example of the stability of the process for calculating the HATFA rates, assume that the yield curve used to calculate the segment rates remains constant from February 2015 (the most recent yield curve released as of this blog post) through September 2015. The calculated rates used to establish the HATFA corridor would be 4.92%, 6.57%, and 7.39%. The low-end segment rates of the HATFA corridor, which make up 90% of those rates, are 4.43%, 5.91%, and 6.65%. They would be the rates used for 2016 plan year valuations. These rates do not change even if the yield curve used to calculate the segment rates were to increase by 42 basis points each month through September 2015 or decrease by 19 basis points each month.

We have calculated 5,000 stochastic simulations of the Pension Protection Act of 2006 (PPA) yield curve, assuming current funding laws remain in place throughout this calculation and using Milliman’s capital market assumptions. The table below shows the results for the next four years showing the 50th percentile of the 24-month average rates (assuming a calendar-year plan with no look back period), and a range using the 5th and 95th percentile rates as endpoints for 2015-2018.

Year 2015 2016 2017 2018
First Segment Rate 1.22% 1.48%(0.94%-2.11%) 1.89%(0.46%-3.71%) 2.30%(0.16%-5.11%)
Second Segment Rate 4.11% 3.94%(3.49%-4.42%) 4.04%(2.81%-5.37%) 4.36%(2.55%-6.50%)
Third Segment Rate 5.20% 4.96%(4.56%-5.37%) 5.04%(3.98%-6.17%) 5.40%(3.86%-7.08%)

As the table indicates, short term interest rates are projected to rise over the next several years, perhaps as much as over 100 basis points. Mid-term and long term rates are projected to initially fall and then rise about 20 to 25 basis points over the next several years. As such, the effective interest rate on this basis would rise by about 25 basis points depending on the plan’s payout streams.

Next, the following chart provides the 50th percentile of the stochastic simulations of the low end of the HATFA rates through the 2018 plan year, and a range using the 5th and 95th percentile rates as endpoints for each segment for 2015-2018. As a reminder, the segment rate to use when calculating liabilities is the greater of the 24-month average rate and the low-end HATFA corridor rate. Therefore, if the HATFA rate is lower than the 24-month average rate, the 24-month average rate will be used in the stochastic simulation.

Year 2015 2016 2017 2018
First Segment Rate 4.72% 4.43%(4.43%-4.44%) 4.16%(4.13%-4.19%) 3.71%(3.63%-5.10%)
Second Segment Rate 6.11% 5.91%(5.91%-5.91%) 5.72%(5.70%-5.74%) 5.23%(5.16%-6.50%)
Third Segment Rate 6.81% 6.65%(6.65%-6.65%) 6.48%(6.46%-6.50%) 5.96%(5.90%-7.08%)

As this table indicates, despite the rise in the 24-month average rates, the HATFA rates drop by 85 to 101 basis points. This would cause a typical plan’s effective interest rate for funding purposes to drop by 84 basis points from 2015 to 2018, which leads to an increase in the Target Liability by over 10.5%. The large drop in the HATFA rates from 2017 to 2018 is due to two reasons: the HATFA corridor widens by 5% starting in 2018 so the low end of the corridor is now 85% of the 25-year average used to calculate the HATFA rates; and the highest rates in the 25-year average used to calculate the HATFA rates are removed by 2018.

Based on the stochastic simulations, it would appear that the 2016 plan year HATFA segment rates have already been determined. The 5th to 95th percentile interval around the midpoint rate is the same except for an increase of one basis point in the first segment, and the 24-month average rates do not approach the HATFA rates. In addition, it can reasonably be predicted that the 2017 rates will be the HATFA rates based on these simulations. This is due to the 24-month average rates in the first table not approaching the HATFA corridor rates in the second table. Because the 5th to 95th percentile interval around each projected 2017 plan year HATFA rate is narrow, using the midpoint rates in projecting 2017 liabilities will result in a good estimate of the 2017 liability to be used for minimum funding purposes.

However, for 2018 the 5th to 95th percentile interval around the midpoint HATFA rate widens, especially going from the 50th percentile to the 95th percentile. This increase is due to the projected 24-month average being greater than the low-end HATFA corridor rate. The likelihood of the 24-month average rate falling inside the HATFA corridor increases in the next several plan years as the HATFA corridor widens to 70% to 130% of the 25-year average. Therefore it becomes harder trying to predict plan year segment rates starting in 2018.




The evolution of the discount rate for measuring employee benefit obligations under AS15(R)

This paper by Milliman consultants Danny Quant and Simon Herborn provides an update for the quarter ended June 30, 2014, on discount rate changes as they apply to liabilities under AS15(R), India’s accounting standard for the cost of providing employee benefits. Implied yields have fallen since March 31, 2014. The impact of this fall will depend on the weighted average expected future working lifetime (WAEFWL) of employees.