Tag Archives: Ladd Preppernau

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.

Tackling the challenges of traditional plan designs

Pension plan trustees are looking for more robust retirement solutions for the future to avoid the struggles many traditional pension plans have faced. They want to make their defined benefit pension plans less vulnerable to the risks inherent in retirement, but don’t want to change to defined contribution plans that offload these risks onto participants. Modified variable annuity plans, such as the Milliman Sustainable Income Plan™, could be a good option because they maintain plan funding and preserve contribution stability better than traditional designs. Milliman’s Kelly Coffing and Ladd Preppernau provide some perspective in this article.

Multiemployer pension funding levels experience slight uptick overall, but poor plans grow poorer

Milliman has released the results of its Spring 2017 Multiemployer Pension Funding Study, which analyzes the funded status of all multiemployer pension plans. As of December 31, 2016, these plans have an aggregate funding percentage of 77%, a 1% increase since June 2016. During that six-month period, the market value of assets increased by $17 billion while pension liabilities increased by $13 billion, resulting in a $4 billion decrease in the aggregate funding status shortfall.

But results vary by plan; while noncritical plans experienced an aggregate funding percentage of nearly 85%, the funding level for critical plans is under 60%. The gap continues to widen between critical and noncritical plans. While the funding percentage of healthier plans has increased slightly, critical plans have seen no appreciable increase. Persistent strong returns would be needed to see any appreciable improvement in funded status.

A closer look into how contributions are distributed shows that plans facing severe funding challenges only spend 38 cents of each contribution dollar on new benefit accruals, while 50 cents of every dollar goes to pay down funding shortfalls. Healthier plans spend 56 cents per contribution dollar on benefit accruals and 32 cents on funding shortfalls. The remaining 12 cents in both scenarios is spent on expenses.

This is the first of three pension funding studies Milliman will be releasing this week. To view the complete study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

Variable annuity pension plan reading list

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Variable annuity pension plans (VAPPs) are hybrid retirement plans that provide employers an alternative design to the traditional defined benefit (DB) plan and the defined contribution (DC) plan. VAPPs can stabilize contributions for sponsors while offering participants lifelong income. This reading list highlights various information related to VAPPs.

• “Retirement risks side-by-side: DB vs DC vs VAPP”
In this video blog, I discuss the retirement risk allocation between a plan sponsor and the plan’s participants in a variable annuity pension plan (VAPP) structure compared with risk analyses associated with traditional defined benefit plans and defined contribution plans. I also explain how a VAPP can reduce inflation, portability, and interest rate risks.

• “Benefits side by side: DC vs DB vs VAPP”
VAPPs provide secure, lifelong, inflation-protected retirement benefits. VAPPs combine the best of what traditional DB plans do regarding longevity protection and lifelong income and what DC plans do to combat inflation. In this second video presentation, I explain the advantages for retirees of VAPPs compared to more traditional plan structures.

• “Plan funding side by side: Traditional DB and VAPP”
VAPPs provide lifelong inflation-protected benefits to participants. VAPPs can also stabilize plan contributions for employers. In this video presentation, I discuss how funding a VAPP compares with funding a traditional pension plan. The presentation also touches on how Milliman helps plan sponsors stabilize benefits for retirees through reserves.

• “Employee communication: Transition to a VAPP
Some employers have considered switching their current retirement plan to a VAPP. Communicating the change in retirement benefits can be a challenge for plan sponsors. This blog, written by Milliman’s Heidi tenBroek, features a video that explains to employees how a VAPP works, how it affects their benefits, and why it is a stable retirement solution for them and their employer.

• “Milliman infographic: Variable annuity pension plan
The VAPP design combines features from traditional DB plans along with features from DC plans. This infographic illustrates specific retirement plan sponsor needs that VAPPs help address.

• “VAPPs: Coming soon to a retirement plan near you?
In this blog, Milliman consultant Grant Camp summarizes the DB plan and DC plan features of VAPPs.

• “Milliman Hangout: Variable annuity pension plans (VAPPs)”
Camp and I talk about VAPP features in this video. They also discuss the value VAPPs offer sponsors and participants.

“Making the case for variable annuity pension plans (VAPPs)”
VAPP retirement benefits increase or decrease depending on whether a plan’s investments return more or less than the established “hurdle rate.” A benefit stabilization strategy preserves funding stability and diminishes benefit declines. Camp and I discuss the strategy in this article.

“Making the case for variable annuity pension plans (VAPPs): Basic VAPP benefits and design strengths”
This article provides examples of how a retiree’s basic VAPP benefits would change over different historical periods. The article also details the strengths and weaknesses of the VAPP design.

“Making the case for variable annuity pension plans (VAPPs): Stabilized VAPP benefits”
In this article, Camp, Ladd Preppernau, and I discuss the stabilized VAPP model. The design involves building a reserve, spending the reserve in down markets to prevent benefit decreases, and improving benefits if the reserve is larger than is required to prevent benefit decreases.

Making the case for variable annuity pension plans (VAPPs): Shared retirement risks: How VAPPs stack up
There are four main risks associated with retirement plans: investment risk, interest rate risk, inflation risk, and longevity risk. This article, authored by Camp, Preppernau, and I provides perspective on how VAPPs address these risks.

“A balanced approach to retirement risk”
VAPPs address several sponsor concerns like funding and accounting volatility. The design also helps alleviate participant concerns related to money management and inflation. Milliman’s Camp offers more perspective in this blog.

“Variable annuity plans may benefit employers and employees”
In this blog, Milliman’s Ryan Hart provides a chart comparing and contrasting VAPPs alongside DC plans and traditional DB plans.

“Variable annuity pension plans: An emerging retirement plan design”’
In this article, Mark Olleman and I provide historical scenarios of how retirees’ benefits would vary over time under a VAPP structure.

“Variable Annuities: A retirement plan design with less contribution volatility”
Multiemployer plan trustees seeking sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions may want to consider the VAPP design. This paper by Olleman, Preppernau, and I explains the advantages that VAPPs offer single and multiemployers and their employees.

Multiemployer plans explore variable annuity plans for less contribution volatility

The Variable Annuity Pension Plan (VAPP) is now the Milliman Sustainable Income PlanTM (SIP).

Some multiemployer pension plans have had their funded status deteriorate because of the difficult and volatile investment markets of recent years, leading to either increased contributions or reduced benefits—or in some cases both. For some multiemployer plans, this has made collective bargaining more difficult, reduced participant pay increases, and caused some employers to struggle to stay competitive. Multiemployer plan trustees may be looking for alternative, sustainable ways to provide participants with lifelong benefits that allow for more predictable contributions.

One alternative for multiemployer trustees to consider is changing the pension plan so that future accruals are paid through a variable annuity plan (sometimes referred to as adjustable pension plans). Much like changing to a defined contribution (DC) plan, changing to a variable annuity plan shifts the plan’s investment risk for future benefit accruals to the participants. A new Milliman white paper, “Variable annuities: A retirement plan design with less contribution volatility,” describes variable annuity plans and some advantages they may have over DC plans.

To download the entire paper, click here.