Tag Archives: milliman

10.08.24
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Milliman: Corporate Pension Funding Weakens in September

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Milliman has released the latest results for the Milliman 100 Pension Funding Index (PFI). This index reviews the funding status each month of the top 100 U.S. corporate pension plans. The report indicated that the funded ratio declined to 102.4% at month-end from 102.6% at the end of August. Plan assets increased as a result of a 1.74% investment gain, but the discount rate declined by 0.14% to 4.96%. As a result, the growth in liabilities eclipsed asset growth leading to a $12 billion loss in funded surplus.

Assets for these combined plans now total $1.36 trillion as of September 30, while the projected benefit obligation is now $1.33 trillion giving these 100 corporate plans a $29 billion surplus. According to Zorast Wadia, author of the PFI, the current discount rate at 4.96% marks the first time since April 2023 that the rate hasn’t been >5.0%. However, so far in October we’ve witnessed a fairly significant move up in rates. If this trend continues, we could see the funded ratio for this index once again rising if the increase in rates doesn’t negatively impact the asset side of the pension equation.

07.15.24
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Milliman: Improved Corporate Pension Funding Continues

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Milliman has once again produced its monthly update of the Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Thank goodness they can still find 100 corporate plans to evaluate. Despite my snarkiness, it is good to read that Milliman is reporting improved funding for the sixth consecutive month in 2024, with a slight increase in the funded ratio from 103.6 to 103.7. The surplus remained the same at $46 billion.

June’s investment return of 1.22% matched the $9 billion increase in liabilities as the discount rate fell 7 bps to 5.46%. “The first half of 2024 has seen nothing but funded ratio improvements,” said Zorast Wadia, author of the PFI. “However, with markets at all-time highs and concerns that discount rates may eventually fall, the forecast for the second half of 2024 may not be as sanguine, and liability-matching portfolios will continue to be prudent strategies for plan sponsors.”

We absolutely agree with Zorast’s assessment of what may transpire in 2024’s second half. There has clearly been a slowing in economic activity as seen by the GDP in Q1’24 (1.4%) and Q2’24 is not looking much more robust, as the Atlanta Fed’s GDPNow model presently forecasts a 2.0% real GDP annualized return for the second quarter. If economic weakness were to develop, as a result of the Fed’s campaign to stem inflation by raising the Fed Fund’s rate (presently 5.25% – 5.5%), US interest rates could fall, while equities could also cool off as a result of the economic weakness. A combination such as this would be quite detrimental to pension funding.

In related news, FundFire has published an article highlighting the fact that “fixed income products now make up about 54% of defined-benefit portfolios, according to Mike Moran, senior pension strategist at Goldman Sachs Asset Management. He is obviously speaking about corporate plans, as both public and multiemployer exposures to fixed income are much more modest. Happy to see that Moran was quoted as saying that he “urges pension managers to act quickly to de-risk.” He went on to say, “This is a period of strength, a position of strength, for plan sponsors, and history shows us that the position of strength can sometimes be fleeting,” We absolutely agree.

We’ve been encouraging plan sponsors of all types to act to reduce risk and secure the promised benefits before the Fed or market participants reduce rates from these two-decade high levels.

06.11.24
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Corporate Pension Funding Improves Once More – Milliman

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Milliman is reporting improvement in the funded status for the largest corporate plans. According to the Milliman 100 Pension Funding Index (PFI), corporate funding improved from 103.1% to 103.4% during May, marking the fifth consecutive monthly improvement to start 2024. Milliman attributed the improved funding to asset gains driven by the year’s best month at 2.29% driving the indexes assets up by $22 billion to $1.3 trillion. With the decline in the discount rate of 15 bps, pension liabilities grew by $18 billion and now stand at $1.25 trillion. According to Zorast Wadia, the discount rate used by Milliman is the FTSE Pension Liability Index, which is similar to ASC 715 rates. As a reminder, Ryan ALM, Inc. has produced ASC 715 rates since 2007. The $4 billion difference between pension assets and plan liabilities produced the 0.3% funding improvement.

Milliman’s monthly reporting also includes scenario testing. In the latest work, Milliman forecasts 2024 and 2025 interest rates and asset returns. In the optimistic case they forecast the discount rate at 5.88% at the end of 2024 and 6.48% at the end of 2025, while assets grow at 10.4% per annum during that time. If achieved, the funded status for the Pension Funding Index would ratchet up to 110% at the end of 2024 and 123% by 2025’s conclusion. These levels would rival what we had at the end of 1999, when Pension America should have defeased the liabilities.

A pessimistic forecast has the discount rate falling to 5.18% by the end of 2024 and 4.58% by December 31, 2025. Assets under this scenario produce only a 2.4% annualized return. If this forecast were to become reality, the PFI funded status would be 98% by the end of 2024 and 89% by the end of 2025. Since most of us have no clue where rates are going in the next couple of years, why play the game. Defease your plan’s liabilities at the current level of rates. We’ve seen too often greed creep into the equation instead of sound risk management. Use this opportunity to substantially reduce risk by matching and funding benefits and expenses with asset cash flows of interest and principal.

04.05.24
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Corporate Funding Improves in March – Milliman

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Milliman released the results of its latest Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. Pension funding improved for the third consecutive month to start the year, which now stands at 105.6% from 105.3% at the end of February. March was a bit different, however, as the discount rate declined 11 basis points increasing the collective liabilities by $14 billion to $1.299 trillion at the end of the quarter. Despite the increase in liabilities, investment performance was once again strong leading to a gain of $19 billion. Total assets now stand at $1.373 trillion.

Zorast Wadia, author of the PFI, stated, “the funded status gains may dissipate unless plan sponsors adhere to liability-matching investment strategies. Zorast’s observation is outstanding. Should rates fall from these levels, the cost to defease pension liabilities will grow. Now is the time to take risk off the table. Create certainty by getting off the asset allocation rollercoaster. Engaging in Cash Flow Matching (CFM) does not necessitate being an all or nothing strategy. Start your cash flow matching mandate and extend it as the funded status improves.

Return-seeking bond strategies will lose in an environment of rising rates. However, once a plan engages in CFM, the relationship between plan assets and liabilities is locked. Done correctly, assets and liabilities will move in tandem. It doesn’t matter what interest rates do, as benefit payments are future values that are not interest rate sensitive.

Act now to create some certainty! You’ll appreciate the great night’s sleep that you’ll start to have.

03.12.24
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Corporate Pension Funding Continues to Improve

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

The Milliman organization does a terrific of providing frequent and very useful updates through their Milliman 100 Pension Funding Index (PFI). They are reporting that the funded status improved by $26 billion in February for the largest 100 corporate defined benefit pension plans. The funded status at the end of February sat at 104.9% up from 102.8% at the end of January 2024.

All of the improvement in the funded status is the result of a higher discount rate that reduced the present value of those future pension promises. Unlike public pension plans, corporate accounting uses a AA corporate rate to value liabilities and not the ROA. Assets don’t need to rise in order for pension funds to show improvement in the funded status. In fact, during the month, Milliman estimates that liabilities fell in value by $30 billion. The current funding surplus for the members of this index stands at $63 billion at month end.

What’s next for these companies? Much of Corporate America has already begun to de-risk their plans. For those that haven’t the time is now to consider taking some risk out of the asset allocation. We certainly don’t want to see a repeat from 1999, when pensions were well over-funded on to see that funded status deteriorate rapidly with the advent of two major equity market declines. Importantly, de-risking doesn’t mean getting out of the pension game. it does mean that you, as the sponsor, don’t want to continue to ride the asset allocation rollercoaster up and down which can impact contribution expenses.

Migrate your fixed income from a return-seeking mandate to one that is now going to use bond cash flows of interest and principal to match the liability benefit payments. In an uncertain environment as to the direction of US interest rates, utilizing a cash flow matching (CFM) strategy will lock up the relationship with those pesky liabilities and eliminate interest rate risk for that portion of the portfolio. How comforting is that?