Corporate Pensions’ Funded Level Rises $32 Billion in Two Months

The funded status of the 100 largest US corporate pension plans rose by $7 billion in October to 84.7%, from 84.3% at the end of September, according to the latest Pension Funding Index (PFI) from consulting and actuarial firm Milliman.

Added to September’s increase of $25 billion, the funded status of the largest 100 US corporate pension plans has improved by $32 billion since Aug. 31, while their deficit fell to $266 billion. The October gains came from investment returns of 1.19% for the month, bringing the cumulative investment gain in 2017 to 9.57% year-to-date. The market value of assets rose by $12 billion as a result of October’s investment gain.

The funded status improvement was partially offset by pension liability increases resulting from a decrease in the benchmark corporate bond interest rates used to value the liabilities.

“While October’s investment returns are well above expectations, funded status gains were partially offset by the continued low discount rate environment,” said Zorast Wadia, co-author of the Milliman 100 PFI. “It will be interesting to see what, if any, changes are in store to interest rate strategy with the nomination of a new Fed chair.”

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The Milliman 100 PFI asset value increased to $1.476 trillion at the end of October. The projected benefit obligation (PBO), or pension liabilities, increased to $1.742 trillion at the end of October, from $1.737 trillion at the end of September. The change resulted from a decrease of three basis points in the monthly discount rate to 3.66% for October from 3.69% for September.

Between November 2016 and October 2017, the cumulative asset return for the pensions is 10.53%, while the Milliman 100 PFI funded status deficit has improved by $105 billion during that time. The company said discount rates experienced a small increase over the last 12 months, rising to 3.66% as of Oct. 31, from 3.61% a year earlier. Meanwhile, the funded ratio of the Milliman 100 companies has increased over the past 12 months to 84.3% from 79.0% due primarily to higher-than-expected investment returns.

Milliman said that if the 100 largest US corporate pension plans were to achieve the expected 7.0% median asset return, and if the current discount rate of 3.66% held steady for 2017 and 2018, the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $259 billion (85.1% funded) by the end of 2017, and $212 billion (87.8% funded) by the end of 2018. The figures use assumed 2017 aggregate contributions of $36 billion, and 2018 aggregate contributions of $39 billion.

The company also said an optimistic forecast that includes interest rates reaching 3.76% by the end of 2017, and 4.36% by the end of 2018, with 11.0% annual returns, would see the funded ratio climb to 87% by the end of 2017, and 100% by the end of 2018. However, a pessimistic forecast of a 3.56% discount rate at the end of 2017 and 2.96% by the end of 2018, with only 3.0% annual returns, would see the funded ratio decline to 84% by the end of 2017, and to 77% by the end of 2018.

Tags: Corporate Pension, Funded Status, Milliman, Pension

The California Public Employees’ Retirement System (CalPERS), the largest US pension fund, will consider significant changes to its allocation targets in a workshop being held today. According to a presentation released by the pension, four possible portfolios are being considered that have a range of changes, including a significant increase in fixed-income investments.

Right now, the $343.6 billion pension is 50% invested in global equities, followed by a 19% allocation to fixed-income, with the remaining 31% split between inflation assets, infrastructure, private equity, and real estate. The proposed changes would maintain the portfolio’s heavy tilt to global equities, while likely increasing investments in fixed-income. The proposed increase in fixed-income ranges from 28% in one option, to as much as 44% in another.

The new portfolio mix would also put infrastructure and real estate into the real assets category and increase the investment target to 13%. Currently, infrastructure and real estate account for 2% and 9% of the portfolio, respectively. The proposed changes also cut CalPERS’s current 8% allocation to inflation assets entirely. CalPERS’s investments in private equity will remain at the current 8% rate.

By reorienting the portfolio to a larger fixed-income allocation, the fund’s average expected return will drop to 6.5% from 7%, owing to low bond yields. That change would require larger payments into the pension in order to maintain funding goals. CalPERS’s funded status has already dropped from 76% in 2013, to 68% as of June 30, 2017. Only one proposed portfolio would increase the return goal to 7.25%, but that is also a riskier asset mix with higher allocations to global equities and an unchanged allocation to fixed-income.

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Making a push for bigger payments could be a tough sell at CalPERS. Board members have already voiced opposition to higher payments. The pension is also considering a change to its pension debt repayment schedule that would backload payments and extend the timeline for repayment, an option that was heavily criticized in a local editorial last week.

The pension board is slated to vote on the proposed changes and pick a new portfolio mix in mid-December. If changed, the new portfolio would go into effect on July 1, 2018. CalPERS re-evaluates its portfolio mix every four years. The current portfolio was approved in 2013.

For any fact checking – this is on page 5 of the power point.

For fact checkers – this is noted in the “discount rate” table on page 26. The discount rate is the average expected return of the total portfolio.

Tags: CalPERS, Fixed-Income, Pension