Milliman’s MBW International counterpart, Barnett Waddingham, recently published a report focusing on the corporate pension funding status for plans in the United Kingdom. The report is comparable to the Milliman Pension Funding Study, which covers the 100 largest U.S. corporate plan sponsors. In this article, Milliman’s Zorast Wadia and Barnett Waddingham’s Andrew Vaughan and Lewys Curteis explore the similarities of the two reports.
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.
Data from Milliman’s 2017 Corporate Pension Funding Study was recently the focus of an interactive graphic in Pensions & Investments entitled, “Top plans surpass their targets” (subscription required).
Milliman has released the results of its 2017 Pension Funding Study, which analyzes the largest corporate pension plans sponsored by 100 U.S. public companies. In 2016, these pension plans experienced a $21.7 billion decrease in funded status, the result of a $54.0 billion increase in the projected benefit obligation (PBO) that was only partially offset by a $32.3 billion increase in the market value of plan assets. As a result, these Milliman 100 plans finished off the year with a funded ratio of 81.2%, down from 81.9% the year before. But the $21.7 billion deterioration and incremental drop in funded status mask a year that experienced volatility across the board for pension plans.
The last year was quite the tug-of-war for these pension plans. Investment performance exceeded expectations, with the 100 largest U.S. pensions experiencing returns of 8.4%—compare that with 0.8% the year prior. But the volatile interest rate environment saw the discount rate plummet by 30 basis points. In 2016, these dynamics resulted in a funded ratio that oscillated back and forth for most of the year before the postelection bump. The end result was a funded ratio of 81.2%—not that far off from where we’ve been at the end of 2015 and 2014.
Study highlights include:
Analysis of asset gains. The 8.4% investment returns experienced by these pension plans was well above the 7.0% return expectation set for 2016. Meanwhile employers’ 2016 plan contributions were up 38% from the year prior. One possible reason for the higher plan contributions is that they improve funded status, resulting in lower Pension Benefit Guaranty Corporation (PBGC) premium expenses.
Impact of updated mortality assumptions. Further decreases in future life expectancy for the second year in a row result in significant reductions in projected benefit obligation (PBO) for several Milliman 100 companies.
Use of spot rates increases by 24%. Forty-six of the largest 100 plan sponsor companies will consider recording the fiscal year 2017 pension expense using an accounting method change linked to the spot interest rates derived from yield curves of high-quality corporate bonds. The move to spot rates will result in pension expense savings.
Pension risk transfers continue. The estimated sum of pension risk transfers to insurance companies (“pension lift-outs”) and settlement payments increased from $11.6 billion in FY2015 to $13.6 billion in FY2016.
To view the Milliman Corporate Pension Funding Study, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.