Home > News > Pensions > Despite Robust Returns, Funding Level for Top 100 US Corporate Plans Drops in 2019
Pensions

Despite Robust Returns, Funding Level for Top 100 US Corporate Plans Drops in 2019

Record-low rates negate plans’ 15.66% investment return for the year.

By Michael Katz

Thanks to record-low discount rates the funded level of the 100 largest US corporate pension plans declined in 2019, despite having assets outperform expectations with a robust return of 15.66%.

The Milliman 100 Pension Funding Index (PFI), which tracks the funded levels of the 100 largest US corporate pension plans, said the average funded ratio of those plans fell to 89% at the end of 2019 from 89.4% at the end of 2018.

Milliman, a consulting firm that publishes the index, said despite the strong investment returns in 2019, sharply dropping discount rates resulted in an $30 billion overall drop in plans’ funded status. The Milliman 100 discount rates fell 99 basis points to 3.20% at the end of 2019 from 4.19% at the end of 2018, and the year-end rate was the lowest year-end discount rate in the 19-year history of the index.

“For corporate pensions during 2019, the funded status environment was like trying to fill a bucket full of holes with water,” Zorast Wadia, author of the Milliman 100 PFI, said in a release. “Funding levels would rise given superb asset gains but then quickly recede given offsetting liability movements attributable to ever-falling discount rates.”

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

The return on assets was a sharp contrast to the 2018 investment loss of 2.94%. Milliman said the past year was favorable for both fixed income and equity investment classes. He said it was the sixth time in the last 10 years that investment returns beat expectations. But while plan assets were up $174 billion for the year, plan liabilities increased $204 billion because of declining interest rates, which resulted in the projected benefit obligation (PBO) surging 17.35%.

The firm said the third quarter was by far the worst of the year. Flat investment returns combined with all-time low rates lead to a $64 billion plunge in funded status during the quarter to drop the funded ratio to 85.4% as of September 30. The fourth quarter, however, proved to be a sharp turnaround as pension assets posted above average returns and discount rates rallied in December to bring total asset value of the Milliman 100 PFI to $1.618 trillion at year-end 2019.

Two elements will be crucial for coming months, Milliman said. If the plans were to earn the expected 6.6% median asset return per its 2019 pension funding study, and if the current discount rate of 3.20% remains through 2021, their funded status would increase to 92.7% by the end of 2020. It also would rise to 96.6% by the end of 2021.  

But under a pessimistic forecast that includes a  discount rate of 2.60% at the end of 2020, and 2.00% at the end of 2021, combined with 2.6% annual returns, the funded ratio would fall to 82% by the end of 2020, and 76% by the end of 2021.

“Looking ahead to 2020,” said Wadia, “many plan sponsors can expect to have a rise in pension expense given the funded status losses suffered by plans during 2019.”

Related Stories:

US Corporate DB Pension Funding Falls $11 Billion in July

2019 Funding Ratio Drops Despite November Lift in US Corporate Pension Investment Returns

US Corporate Pensions Will Likely Miss Return Assumptions

Tags: , , , , , ,

Home > News > Pensions > Musicians’ Pension Fund Applies for Benefits Cut
Pensions

Musicians’ Pension Fund Applies for Benefits Cut

Proposed reductions would affect nearly half of plan’s 51,000 participants.
By Michael Katz

The New York-based American Federation of Musicians and Employers’ Pension Fund has started the year on a down note as it told its participants that it is looking to cut benefits in order to stave off insolvency.

The fund, which has nearly 51,000 members, has applied to the US Treasury Department to reduce earned benefits under the Multiemployer Pension Reform Act (MPRA). The plan has been certified to be in “critical and declining” status, which means it is projected to run out of money within 20 years. If approved, the benefit reductions would go into effect on Jan. 1, 2021.

More than 53%, or just over 27,000 participants, would see no reduction of benefits, while just under 45%, or almost 23,000 participants, would have their benefits reduced by as much as 19%. Less than 2%, or more than 900 participants, would have their benefits reduced by between 20% and 40%.

The fund has faced “a combination of daunting financial challenges over the past several years” particularly from investment losses during the Great Recession of 2008-09. It said sharply rising benefit payments have increasingly exceeded contributions. It also blamed a lack of action by Congress to solve the multiemployer pension funding crisis.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

“For more than two years, Congressional leaders have been undertaking negotiations for a bipartisan legislative solution that would provide financial assistance to our fund and the more than 120 other multiemployer pension funds across the nation,” said the fund in its newsletter for participants. “The trustees have been advocating for such legislation, but we also know that we cannot sit idly by waiting for it to happen.”

Although the fund called applying for a cut in benefits “a painful decision,” it said its only other option would be to do nothing. That would let the multiemployer pension lifeboat, the Pension Benefit Guaranty Corporation (PBGC), bail the fund out.  The statement said if that that were to happen many participants would face an even larger reduction in benefits than under its plan.

The fact that the PBGC is facing its own financial crisis was also a factor in the fund’s decision to seek a reduction of benefits.

“Absent a change in the law, the PBGC currently projects its multiemployer program will become insolvent by the end of its 2025 fiscal year,” said the fund. “If the PBGC were to become insolvent, it would not be able to pay the full benefit it guarantees. In that case, your benefit could be much less than even the current PBGC guaranteed amount.”

Related Stories:

Treasury Gets Benefits Reduction Happy

Michigan Pension Fund Seeks Benefits Reduction

Treasury Approves Benefits Reduction for Michigan Pension

Tags: , , , , , ,

«