Milliman analysis: Discount rates deepen pension funding deficit and make 2014 a banner year for liability-driven investing
In reversal of 2013, pension plans with the highest proportion of fixed income allocation experienced a 14.5% average return in 2014
SEATTLE, April 2, 2015 /PRNewswire/ -- Milliman, Inc., a premier global consulting and actuarial firm, today released the results of its 2015 Pension Funding Study, which analyzes the 100 largest US corporate pension plans. In 2014, these pension plans experienced an increase in the pension funding deficit despite a 10.9% investment gain, with plan liabilities for these 100 plans increasing by $189.2 billion and assets increasing by $57.9 billion. This resulted in a $131.3 billion increase in the funded status deficit, representing a funded status decline of 6.1%.
"Pension plan sponsors may be feeling whiplash after the last three years," says John Ehrhardt, consulting actuary and co-author of the Pension Funding Study. "In 2012, plans with the heaviest investment in fixed income experienced superior returns. In 2013 we saw the opposite: Plans with heavy equity allocations fared the best. Now with these latest results we've again reversed ourselves, as plans with the highest fixed income allocation once again outpaced the field, despite a strong year for equities. This whiplash is the result of discount rates that hit a record low this year, and continue to define pension funding status."
Study highlights include:
Asset allocations shift toward fixed income. Equity allocations in the pension portfolios dropped to 37.3% by the end of 2014, the lowest in the 15-year history of this study. The companies included in this study have generally shifted toward higher allocations in fixed-income investments.
Risk transfer trend continues. Some plan sponsors engaged in pension risk transfer activities, including two well-publicized pension buyouts conducted for two of the Milliman 100 companies (Bristol-Meyers Squibb and Motorola).
New mortality assumptions increase pension liabilities by 3.4%. The magnitude of these increases is contingent on age, gender and other demographic characteristics of each plan's participants. Based on the footnote disclosures at year-end 2014, the new SOA mortality assumptions appeared to increase pension liabilities by approximately $38.3 billion or 3.4%, at least among those plans that disclosed the impact.
Contributions decline during 2014. The $39.8 billion in contributions during 2014 were the lowest level since 2008, and marked a $4.4 billion decrease from 2013 contribution levels. The lower-than-expected contributions were likely due to plan sponsors changing their contribution strategies in light of the HATFA interest rate stabilization legislation, enacted in August 2014.
Pension expense increases. Robust investment gains in 2014 partially offset the impact of declining discount rates, producing a net increase of $37.1 billion in pension expense. Pension expense hit an all-time high at $56.1 billion in 2012.
Market capitalization of these plans increase by 5.7%. Pension deficits represented less than 10% of market capitalization for 73 of the Milliman 100 companies (down from 78 in 2013).
What to expect in 2014. The passage of HATFA may result in lower contributions on par with those seen in 2014. However for plans already engaged in liability-driven investing, higher contribution levels can be expected. The lower discount rates at the end of 2014 are expected to lead to significant 2015 pension expense increases, since discount rates for the coming fiscal year are set at the start of the fiscal year. This does not factor in any possible plan de-risking activity.
To view the complete study, go to http://us.milliman.com/PFS/. To receive regular updates of Milliman's pension funding analysis, contact us at [email protected].
About Milliman
Milliman is among the world's largest providers of actuarial and related products and services. The firm has consulting practices in healthcare, property & casualty insurance, life insurance and financial services, and employee benefits. Founded in 1947, Milliman is an independent firm with offices in major cities around the globe. For further information, visit milliman.com.
About the Milliman Pension Funding Study
For the past 15 years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies. The results of the Milliman 2015 Pension Funding Study are based on the pension plan accounting information disclosed in the footnotes to the companies' annual reports for the 2014 fiscal year and for previous fiscal years. These figures represent the GAAP accounting information that public companies are required to report under Financial Accounting Standards Board Accounting Standards Codification Subtopics 715-20, 715-30, and 715-60. In addition to providing the financial information on the funded status of their U.S. qualified pension plans, the footnotes may also include figures for the companies' nonqualified and foreign plans, both of which are often unfunded or subject to different funding standards from those for U.S. qualified pension plans. The information, data, and footnotes do not represent the funded status of the companies' U.S. qualified pension plans under ERISA.
SOURCE Milliman, Inc.
Share this article