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.

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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.

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Public Pensions’ Cash and Short-Term Investments Jumped 16.7% in 4Q

Largest quarter-to-quarter increase since 2005, Census Bureau says.

Assets of the 100 largest US public pension fund systems rose 0.4% in the fourth quarter of 2016, to $3.39 billion, the Census Bureau reported. Compared to 4Q 2015, assets, including the plans’ cash and investments, were up 4.2%.

Public pensions’ holdings of cash and short-term investments jumped 16.7% to $136.6 billion in the fourth quarter. “This is the largest quarter-to-quarter increase since 2005,” the Census Bureau reports. Compared to the previous year, public pensions’ holdings of these assets were up an even more impressive 25.6%, from $108.8 billion. In the fourth quarter, cash and short-term investments made up 4% of the total assets of the largest US public pension systems, their highest level of holdings in this asset category since 2011.

By contrast, public pensions’ corporate bond holdings were down 2.7% in market value to $419.5 billion for the fourth quarter. However, compared to a year ago, they gained 2.6%. For the fourth quarter, corporate bonds accounted for about 12% of the cash and investment holdings of public pension fund systems. 

A similar pattern held for international securities. The 4Q market value of public pensions’ international securities portfolios fell, dropping 1.1% from the third quarter to $644.6 billion. Compared to the fourth quarter of 2015, however, their international securities holdings were up 5.7%. International securities accounted for 19% of public pensions’ overall cash and investment holdings for the fourth quarter.

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The market value of the funds’ corporate stock holdings rose 1.1% in the fourth quarter, to about $1.24 billion, for a 4.7% increase from the fourth quarter of 2015. These securities made up about 36% of public pensions’ cash and investments holdings in the fourth quarter. The market value of federal government securities in public pensions’ portfolios was also up 0.5% in the fourth quarter, to $266.4 billion, amounting to about 7.8% of total assets. Compared to a year ago, their value was also up 4.3%.

Employee contributions are playing a bigger role in keeping public pension plans afloat. Contributions by employees rose a substantial 22.5% in the fourth quarter, to $12 billion. Compared to the fourth quarter of 2015, employees increased their contributions 4.2%. Benefits payouts, however, continue to rise. While they were down 2.1% to $64.5 billion in the fourth quarter, they were up 6.1% compared to the fourth quarter of 2015.

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