Tag Archives: Vanessa Vaag

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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FutureCost: Keeping track of retirement plan risks and trends

Defined benefit plan sponsors face a tremendous amount of uncertainty. With financial market volatility and liabilities essentially marked-to-market, understanding short-term risks and long-term trends under countless scenarios is invaluable.

Plan sponsors need to understand the impact of variations in asset returns, discount rates, contribution patterns, investment strategies, and plan design so that they can be prepared for potential effects on plan funded status, accounting costs, and contribution requirements. Understanding and planning for future possibilities is a must. That is why many sponsors are turning to Milliman’s FutureCost.

FutureCost is an interactive model that provides short- and long-term projections of key financial metrics, helping decision makers prepare for what could be right around the corner as well as for what could lie further down the road. The results are easy to produce and review, with both graphical and numerical outputs generated.

Whether looking at a few deterministic projections to illustrate the sensitivity to changes in asset or liability measures of contributions requirements or accounting results, or doing a full stochastic model with thousands of scenarios to assist in the implementation of a liability-driven investment strategy, FutureCost can help sponsors make important decisions, keeping their eyes open to the potential outcomes.

To see an example of data generated by FutureCost, play the video above or click here.