Private-sector defined benefit plans made “significant” funding improvements in 2017, say recent studies. But the good news doesn’t stop there.
Milliman, in its 2018 Corporate Pension Funding Study, bases its findings on an analysis of the financial disclosures of the 100 largest corporate DB plan sponsors. Overall, Milliman says, the funded ratio for those plans rose from 81.1% on New Year’s Eve of 2016 to 86% one year later. The investment firm Cambridge Associates also called the improvement in funded status for many U.S. pension plans “significant” and attributed the change to “strong equity returns, rising interest rates, and large plan sponsor contributions.”
Good News
And the improvement in their funded ratios was not the only good news in 2017, Milliman says:
Corporate DB Statistics, 2017 vs. 2016
Pension Risk Transfer
Milliman says that pension settlements and pension risk transfers (PRTs) “matured” in 2017, and that there was “apparent overall acceptance by the participants and the financial markets” of them. It says that it is unaware of any “significant litigation by participant plaintiffs” claiming harm when an employer pursued a PRT. And it reports broadening in the number of “high quality” insurance companies chosen to pay the pension claims associated with plans involved in a PRT.
A side effect of PRTs, Milliman noted, is that the Pension Benefit Guaranty Corporation (PBGC) will collect less in premiums. Still, it reported a 91% funded ratio for the plans that terminated in 2017 and for which the PBGC served as receiving custodian, and that the PBGC took in more in premiums in 2017 than it paid in pension claims. The amount by which premiums exceeded claims exceeded $1 billion for the first time, the study said.
Clouds on the Horizon
There are some clouds on the otherwise sunny horizon, say Milliman and Cambridge Associates.
Projected Benefit Obligations. Milliman says that the projected benefit obligation for the plans it studied rose $82 billion from $1.718 trillion at the end of 2016 to “an all-time high” of $1.8 trillion at the end of 2017. It attributed this increase to a decline in the discount rate to 3.6%, 37 basis points below the 3.97% rate of 2016.
Milliman added that the increase in the projected obligations exceeded the plans’ collective assets by $20 billion. Milliman did extend a ray of hope, however, saying that investment returns helped to make up that gap.
Addressing Liabilities. For its part, Cambridge Associates warns that U.S. DB plans could negate the progress they’ve made in improving their funded status if they fail to “effectively and thoughtfully” hedge their liabilities. “The gains — amounting to billions of dollars — could be squandered” absent adjustments to make plan assets less volatile relative to liabilities due to changes in the liability discount rate.
Milliman, in its 2018 Corporate Pension Funding Study, bases its findings on an analysis of the financial disclosures of the 100 largest corporate DB plan sponsors. Overall, Milliman says, the funded ratio for those plans rose from 81.1% on New Year’s Eve of 2016 to 86% one year later. The investment firm Cambridge Associates also called the improvement in funded status for many U.S. pension plans “significant” and attributed the change to “strong equity returns, rising interest rates, and large plan sponsor contributions.”
Good News
And the improvement in their funded ratios was not the only good news in 2017, Milliman says:
Corporate DB Statistics, 2017 vs. 2016
| Statistic | 2016 | 2017 | Change, 2016 to 2017 |
| Funding Deficit |
$324 billion | $252 billion | -$72 billion |
| Corporate Contributions to Plan |
$42.6 billion | $62 billion | +$19.4 billion |
| Corporate DB Plan Assets |
$1.488 trillion | $1.55 trillion | +$62 billion |
| Investment Returns | -- | $175 billion | $83 billion higher than expectations |
| Pension Expenses | $31.1 billion | $19.7 billion | -$11.4 billion |
Pension Risk Transfer
Milliman says that pension settlements and pension risk transfers (PRTs) “matured” in 2017, and that there was “apparent overall acceptance by the participants and the financial markets” of them. It says that it is unaware of any “significant litigation by participant plaintiffs” claiming harm when an employer pursued a PRT. And it reports broadening in the number of “high quality” insurance companies chosen to pay the pension claims associated with plans involved in a PRT.
A side effect of PRTs, Milliman noted, is that the Pension Benefit Guaranty Corporation (PBGC) will collect less in premiums. Still, it reported a 91% funded ratio for the plans that terminated in 2017 and for which the PBGC served as receiving custodian, and that the PBGC took in more in premiums in 2017 than it paid in pension claims. The amount by which premiums exceeded claims exceeded $1 billion for the first time, the study said.
Clouds on the Horizon
There are some clouds on the otherwise sunny horizon, say Milliman and Cambridge Associates.
Projected Benefit Obligations. Milliman says that the projected benefit obligation for the plans it studied rose $82 billion from $1.718 trillion at the end of 2016 to “an all-time high” of $1.8 trillion at the end of 2017. It attributed this increase to a decline in the discount rate to 3.6%, 37 basis points below the 3.97% rate of 2016.
Milliman added that the increase in the projected obligations exceeded the plans’ collective assets by $20 billion. Milliman did extend a ray of hope, however, saying that investment returns helped to make up that gap.
Addressing Liabilities. For its part, Cambridge Associates warns that U.S. DB plans could negate the progress they’ve made in improving their funded status if they fail to “effectively and thoughtfully” hedge their liabilities. “The gains — amounting to billions of dollars — could be squandered” absent adjustments to make plan assets less volatile relative to liabilities due to changes in the liability discount rate.
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