Tag Archives: interest rates

Corporate pension funded status dips by $2 billion in May

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In May, these pensions experienced a $2 billion dip in funded status as investment gains mostly offset a four-point decrease in the monthly discount rate. The funded ratio for the Milliman 100 PFI remains unchanged at 91.6% as of May 31.

Sometimes no news is good news for corporate pensions. May’s 0.73% investment gain exceeded monthly expectations, and helped balance out the month’s modest decrease in corporate bond rates.

From April 30, 2018 through May 31st, Milliman 100 PFI plans experienced a $7 billion increase in asset values, while the projected benefit obligations (PBO) rose by $9 billion. As a result, the deficit increased from $139 billion to $141 billion for the month. Over the last year (June 2017 – May 2018), the Milliman 100 PFI funded status deficit has improved by $116 billion.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.34% by the end of 2018 and 5.03% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 100% by the end of 2018 and 116% by the end of 2019. Under a pessimistic forecast (3.64% discount rate at the end of 2018 and 3.03% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2018 and 81% 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.

Corporate pensions’ funded ratio rises to 91.6% despite investment losses in April

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In April, these pensions experienced a $20 billion improvement in funded status thanks to an increase in the corporate bond rates used to measure pension liabilities. From March 31, 2018, through April 30, the monthly discount rate increased 12 basis points, from 3.91% to 4.03%; as a result, pension liabilities decreased by $26 billion for the month. The funded ratio for the PFI plans increased from 90.6% to 91.6%, despite a 0.11% investment loss that reduced index assets by $6 billion.

Corporate pensions continue to get some discount rate relief in 2018, despite volatile equity markets. Over the past 12 months, with the rise in rates and a 6.17% cumulative asset gain for these plans, we’ve seen the funded ratio climb from 85.5% to 91.6%.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.43% by the end of 2018 and 5.03% by the end of 2019) and asset gains (10.8% annual returns), the funded ratio would climb to 101% by the end of 2018 and 117% by the end of 2019. Under a pessimistic forecast (3.63% discount rate at the end of 2018 and 3.03% by the end of 2019 and 2.8% annual returns), the funded ratio would decline to 87% by the end of 2018 and 81% by the end of 2019.

To view the complete Pension Funding Index, click here. This May PFI publication reflects the annual update of the Milliman 100 companies and their latest financial disclosures. To see the 2018 Milliman Pension Funding Study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

Corporate pension contributions reach record level in 2017, funding status improved to 86.0%

Milliman today released the results of its 2018 Corporate Pension Funding Study (PFS), which analyzes the 100 largest U.S. corporate pension plans. Overall, this year’s study found that in 2017 corporate pension contributions hit $62 billion, tying the amount contributed in 2012 for the highest contributions since the inception of the PFS. Seventeen employers contributed at least $1 billion to their plans, with seven of them contributing more than $2 billion.

There were incentives to increase contributions in 2017. Additional contributions can both reduce the Pension Benefit Guaranty Corporation (PBGC) premiums paid by these plans, and allow them to leverage higher tax deductions in light of tax reform enacted at the end of 2017. It’s a trend that’s likely to flourish in 2018, as plan sponsors with calendar year plans can continue to leverage those higher 2017 tax deductions with contributions made prior to September 15 of this year.

The funded ratio for the Milliman 100 plans rose from 81.1% in 2016 to 86.0% in 2017, an increase due largely to strong investment returns coupled with a modest decline in life expectancy assumptions, and the higher level of plan contributions as noted above. Funding ratios for plans ranged from a low of 62.4% for American Airlines to a high of 155.0% for NextEra Energy, Inc.

Other key highlights from the 2018 study include:

Analysis of asset gains. Strong investment returns added $175 billion to the Milliman 100 plans, with a 12.7% rate of return (compared to an expected investment return of 6.8%). Pension assets for the Milliman 100 plans increased to an all-time high of $1.55 trillion.

Analysis of discount rate and pension liabilities. The median discount rate as of year-end 2017 declined to 3.60%, down 37 basis points from 3.97% the year before. Pension liabilities for the Milliman 100 plans increased to an all-time high of $1.80 trillion.

Pension Risk Transfer (PRT) market matures. The 2017 PRT activity for the Milliman 100 plans was slightly smaller than in 2016, with an estimated $12.7 billion in reported dollar volume.

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

Corporate pensions’ investment losses in February buoyed by higher discount rates

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Despite the market volatility in February, these pensions experienced a $13 billion improvement in funded status thanks to an increase in the corporate bond rates used to measure pension liabilities. While the market value of assets for these pensions lost $32 billion in February, plan liabilities also shrunk, narrowing the deficit from $219 billion at the end of January to $206 billion as of February 28. The funded ratio for the Milliman 100 PFI rose from 87.3% to 87.7% during the same time period.

Despite the recent market volatility, February’s 21 basis point discount rate increase buoyed pension funding this month. In fact, thanks to strong investment performance in January along with an increase in discount rates in both January and February, overall pension funding for these plans has risen $75 billion over the past two months—not a bad way to start 2018.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.45% by the end of 2018 and 5.05% by the end of 2019) and asset gains (11.0% annual returns), the funded ratio would climb to 99% by the end of 2018 and 114% by the end of 2019. Under a pessimistic forecast (3.45% discount rate at the end of 2018 and 2.85% by the end of 2019 and 3.0% annual returns), the funded ratio would decline to 82% by the end of 2018 and 75% 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.

Tax reform provides incentive to accelerate pension contributions

The end of 2017 saw the passage of significant tax reform in Congress. With this tax reform, the corporate tax rate has dropped from 35% to 21%, generating quite a bit of attention due to the significant savings that will result for corporations. One relatively unpublicized result has been the additional funding of cash contributions to corporate defined benefit plans.

While contributions made for the 2018 plan year will generally be deducted at the new lower corporate tax rate of 21%, contributions for the 2017 plan year will generally be deducted at the higher rate of 35%. For many corporations with underfunded pension plans, contributing additional dollars or accelerating already planned contributions will generate a net tax savings because underfunded plans are expected to eventually require additional contributions.

More and more, the plan sponsors are issuing corporate debt to make additional pension contributions. For example, General Electric recently announced that it was making a discretionary contribution of $6 billion into its pension plan funded through debt.

In addition to recent tax reform, here are three other reasons we are seeing this trend on the rise:

1. Skyrocketing Pension Benefit Guaranty Corporation (PBGC) premiums. The variable rate premium that corporations pay on underfunded liabilities has increased from 3.4% of the underfunding in 2017 to 3.8% in 2018 (and 4.2% in 2019, as listed in the PBGC website). Any contribution in 2018 to the pension plan immediately reduces the PBGC premium by 3.8% in 2018 (and more in future years). Additionally, that money would then be invested and anticipated to grow with the plan’s expected return (say 6.25%). This leads to an effective return on capital of 10.29% in 2018 (and 10.71% in 2019), and higher returns are anticipated in future years.
2. Updated mortality will drive PBGC liabilities higher by approximately 4%, leading to significant increases in the variable rate contribution.
3. Corporate interest rates remain low and corporations are able to borrow at relatively low costs.

For the purpose of example, let’s look at a theoretical additional contribution of $10 million into an underfunded pension plan. This additional contribution would:

• Reduce fees paid to the PBGC by $380,000 in 2018 (and $420,000 in 2019, and growing in following years)
• Be invested in the trust, and therefore would be anticipated to grow by a company’s expected return on assets in 2018 (likely 5% to 7%, which translates to $500,000 to $700,000 on a full-year basis)
• Reduce the Financial Accounting Standards Board (FASB) accounting expense in 2018 and beyond (by an amount similar to investments in the trust, depending on timing)—to the extent these contributions were anticipated at the beginning of the fiscal year
• Be tax-deductible at the 2017 corporate tax rates because any contribution before September 15, 2018, can count as a 2017 plan year contribution for calendar-year plans

However, there are some limitations:

• While plans that are fully funded on a PBGC basis will not see additional PBGC savings, they will see the additional tax and expense savings as outlined above
• Because of the structure of the PBGC variable rate premium, additional contributions to plans at the PBGC variable premium cap (due to head count) may not share the PBGC advantages, but will see the additional tax and expense savings as outlined above

With tax reform now in place, many corporations are poised to take advantage of opportunities to improve the financial status of their defined benefit retirement plans. Acting sooner rather than later on this opportunity will enable them to stabilize and move their plans more firmly into the black.

Corporate pensions’ $61 billion funded status gain in January may cushion early February market slide

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. While market movement in February may dampen January’s gains, during the first month of 2018 corporate pensions experienced their largest funded status improvements in over a year.

According to Milliman’s analysis, these plans experienced a funding status increase of $61 billion in January, and saw their funded ratio rise from 84.1% at the end of December to 87.2% as of January 31. The improvement is the result of investment gains due to strong market performance and a reduction in liabilities (which was due to an increase in the benchmark corporate bond interest rates used to value pension liabilities).

January’s stellar funding gains may help to cushion the effect of the current market slide witnessed in February thus far for these pensions. It will be interesting to see if the recent volatility paired with U.S. tax reform changes incentivize plan sponsors to pursue funding and de-risking strategies more aggressively than they have in the past.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.29% by the end of 2018 and 4.89% by the end of 2019) and asset gains (11.0% 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 (3.19% discount rate at the end of 2018 and 2.59% by the end of 2019 and 3.0% annual returns), the funded ratio would decline to 81% by the end of 2018 and 74% 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.