US corporate pensions are less likely to push forward with de-risking plans this year due to increasing costs and ballooning liabilities, according to a study by actuarial firm Milliman.
“The lower discount rates at the end of 2014 are expected to lead to significant 2015 pension expense increases.” —MillimanIn the 2015 edition of the company’s annual Pension Funding Survey, Milliman reported that pensions with high weightings to fixed income or running liability-driven investing (LDI) strategies led the returns among corporate plans last year.
However, despite another strong year, falling discount rates meant liabilities ballooned and the aggregate funding position worsened during the year, authors John Ehrhardt, Alan Perry, and Zorast Wadia reported.
“The lower discount rates at the end of 2014 are expected to lead to significant 2015 pension expense increases as discount rates for the coming fiscal year are set at the start of the fiscal year,” the authors wrote.
This year’s total pension expenses could challenge the record level of $56 billion seen in 2012, the actuaries said, and run the risk of exceeding total employer contributions.
As a result of low rates and higher liabilities, Milliman’s report said some pensions “may be hesitant to pursue” big de-risking projects such as a buy-in or buy-out.
In addition, the authors said those pensions running LDI strategies were set to demand more contributions from their sponsors.
“It is likely that these plans haven’t reached full funded status and will need to close their shortfalls,” Ehrhardt, Perry, and Wadia wrote.
The forecast from Milliman’s researchers follow Moody’s prediction of an estimated $110 billion cost of improving life expectancies on corporate pensions in the US.
According to Milliman’s results, total corporate plan assets rose 4.2% to $1.45 trillion during 2014, with those invested heavily in fixed income achieving the best returns. However, liabilities rose by 12% to $1.78 trillion. This led to an overall funding position of 81.7%, down from 87.7% at the end of 2013, echoing recent findings from Towers Watson. Contributions from sponsors also declined during 2014, the authors reported.
Falling discount rates have wiped out the effects of strong investment performance across most of Europe and the US, with the Netherlands and Germany in particular having felt the impact of soaring liabilities.
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