More Corporate Pension Plans Transferring Risk, Milliman reports

Despite fluctuations, the largest pension plans ended 2016 with their funded ratios little changed.

The 100 largest US corporate pension plans saw their funded status drop to 81.2% for 2016, from 81.9% a year earlier, according to actuarial firm Milliman. The $21.7 billion drop in funding resulted from a rise in projected benefit obligations, partially balanced by a rise in the market value of plan assets.

The 100 plans also witnessed quite a bit of volatility in 2016, Seattle-based Milliman reported. “Investment performance exceeded expectations, with the 100 largest US pensions experiencing returns of 8.4%—compare that to 0.8% the year prior,” said Zorast Wadia, an actuary and co-author of the pension funding study, “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 post-election 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.”

Three factors buoyed the 100 largest corporate plans. One was an investment return of 8.4% for 2016, outperforming expectations. Another was employer contributions, which rose 38% from 2015 levels. A third was a decline in estimated life expectancies for the second year in a row, which helped cut projected benefit obligations at several of these companies.

Some companies are planning to adopt an accounting change to cut their pension expenses for fiscal year 2017. This entails moving to spot interest rates that are based on the yield curves of high-quality corporate bonds. For 2017, 46 companies in the Milliman study said they intended to adopt this practice, compared to 37 companies for 2016.

Plan sponsors also boosted their engagement in strategies to transfer pension risk to insurance companies. Pension risk transfers, together with pension risk settlement payments to former plan participants who are not yet retired, rose to $13.6 billion in 2016, from $11.6 billion in 2015 and included such companies as Westrock, United Technologies, PepsiCo, Hewlett-Packard, International Paper, and Verizon. By doing so, plan sponsors also cut down on their required premium payments to the Pension Benefit Guaranty Corporation.

Tags: , , , , , , , , , , , , , , ,

«