Tag Archives: pension funding

January’s discount rate hits 20-year record low, dropping corporate pension funding significantly

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In January, steep discount rate declines caused the PFI funding deficit to swell by $73 billion; the funded ratio for these plans subsequently dropped from 89.0% to 85.7% for the month.

January’s poor funding performance is the result of a 35-basis-point drop in the monthly discount rate, from 3.20% in December to 2.85%, setting the record for the lowest rate ever recorded in the 20-year history of the PFI, and only the second time the PFI’s monthly discount rate has dropped below 3.00%. Pension liabilities increased by $87 billion in January as a result, with the losses only partially offset by strong investment gains of $14 billion.

Corporate pensions are now starting off the year trying to dig their way out of a hole created by January’s steep discount rate drop. While much of the funding improvement from the fourth quarter of 2019 has been wiped out, there’s a silver lining in the strong investment returns experienced this month. Let’s hope that continues, with discount rates rising above 3% again.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.40% by the end of 2020 and 4.00% by the end of 2021) and asset gains (10.6% annual returns), the funded ratio would climb to 99% by the end of 2020 and 116% by the end of 2021.  Under a pessimistic forecast (2.30% discount rate by the end of 2020 and 1.70% by the end of 2021 and 2.6% annual returns), the funded ratio would decline to 80% by the end of 2020 and 73% by the end of 2021.

To view the complete Pension Funding Index, click here. To see the 2019 Milliman Pension Funding Study, click here.

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

Corporate pensions see an overall investment gain of 15.66% in 2019, but funding still drops due to discount rate lows

Milliman today released the year-end results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In 2019, corporate pension funding ended down $30 billion for the year, with the funding ratio dropping from 89.4% at the end of 2018 to 89.0% as of December 31, 2019.

Plan assets outperformed expectations, posting an annual return of 15.66% and a gain of $174 billion. But record-low discount rates resulted in plan liabilities increasing as well, by $204 billion during 2019. As of December 31, the Milliman 100 discount rate had fallen 99 basis points, from 4.19% at the end of 2018 to 3.20% a year later. This marks the lowest year-end discount rate that has been recorded in the 19-year history of the Milliman 100 Pension Funding Index (PFI).

For corporate pensions during 2019, the funded status environment was like trying to fill a bucket full of holes with water—funding levels would rise given superb asset gains but then quickly recede given offsetting liability movements attributable to ever-falling discount rates. Looking ahead to 2020, many plan sponsors can expect to have a rise in pension expense given the funded status losses suffered by plans during 2019.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.80% by the end of 2020 and 4.40% by the end of 2021) and asset gains (10.6% annual returns), the funded ratio would climb to 104% by the end of 2020 and 121% by the end of 2021.  Under a pessimistic forecast (2.60% discount rate at the end of 2020 and 2.00% by the end of 2021 and 2.6% annual returns), the funded ratio would decline to 82% by the end of 2020 and 76% by the end of 2021.

To view the complete Pension Funding Index, click here. To see the 2019 Milliman Pension Funding Study, click here.

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

Uncertainty persists for multiemployer pension plans

Many multiemployer pension plans will not be able to pay the full value of promised benefits to future retirees, and additional measures will be needed in order for them to do so. An immediate concern is the Pension Benefit Guaranty Corporation’s multiemployer trust fund, which is expected to be exhausted by 2025, following the projected insolvency of the Central States, Southeast & Southwest Areas Pension Plan and several other deeply troubled plans that are expected to become insolvent during the next six to seven years. These concerns led to the formation of the Joint Select Committee on Solvency of Multiemployer Pension Plans. In November, a Joint Select Committee deadline to propose a solution came and went, with the committee chairs indicating the committee will continue its work toward a bipartisan solution. This Milliman Multiemployer Alert offers some perspective.





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.

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Understanding annual pension funding notices

It’s easy to understand why pension participants get confused looking through their annual plan funding notices. The notice presents several different measures of the plan’s funded status and provides details for multiple measurements at different points in time. In a new article entitled “Funded status measurements for U.S. pensions,” Zorast Wadia explains these types of measurements.

The article was written as an introductory piece for an international audience, providing perspective on funded status measurements under U.S. Internal Revenue Service (IRS) pension funding rules.

Here is an excerpt:

Funded status measurements
Several funding status measurements can possibly be derived from reading an annual funding notice. Each of the following funded status measurements involves comparing a plan’s asset measure to its liability measure, and often the comparison is made with and without respect to the inclusion of credit balances. Exactly which components are used within a particular funded status measurement is quite important. The various permutations on funded status measurements that exist can make this subject a little complicated and somewhat burdensome to explain to the non-pension practitioner.

Measurement Number 1: Actuarial value of assets compared to the funding target
These results appear on the first page of the funding notice and are shown for the last three years. If a plan’s actuarial value of assets is greater than or equal to a plan’s target liability, the plan is generally considered well funded and free of potential benefit restrictions. Depending on their nature, benefit restrictions may limit distribution options, benefit improvements or benefit accruals. If a plan’s actuarial value of assets is less than the target liability, then things start to get a little more complicated and this often leads to a more refined measure of the plan’s funded status.

Measurement Number 2: Actuarial value of assets reduced by the credit balances compared to the funding target
This funded status measurement is shown on the funding notice and often results in a highly skewed funding measure, depending on the size of a plan’s total credit balance. A plan may only be slightly underfunded when comparing just the actuarial value of assets with the target liability, but may be greatly underfunded when one subtracts credit balances from the asset value. This key measurement often determines whether a plan faces benefit restrictions. This measure may also determine whether a plan will need to make minimum funding contributions on an accelerated basis in the following year. Lastly, it can also have a great impact on the calculation of the amortization cost or credit component of the minimum funding requirement.

This article was published in the May 2013 issue of International News, a Society of Actuaries publication.