Milliman Reports Corporate Pension Plan Funded Ratio Dip, Wilshire Sees Rise

For corporate pension plans singed by drop in discount rates, dips are partially countered by rising market returns.

Corporate pension plans’ funded ratio dipped to 81.5% for February, from 81.6% for January, according to Milliman. The funded ratio, based on the 100 largest defined benefit pension plans of US public companies, had been rising in the previous five months, and is up about 3% over the past 12 months. It dipped in February as a result of a drop in the discount rate to 3.89%, from 4% for January, according to the Seattle actuarial firm.

Investment gains of 1.74% in February helped counter the negative effect from discount rates somewhat. “While February’s strong investment gains helped soften the blow dealt by the discount rate decline, all eyes are on interest rates right now,” said Zorast Wadia, a Milliman consulting actuary.

If the Federal Reserve goes through with a series of interest rate hikes this year, it would benefit corporate pension plan funded ratios. Milliman anticipates that if interest rates touch 4.39% by the end of this year, and 4.99% at the end of 2018, accompanied by annual investment gains of 11.2%, the funded ratio would climb to 91% by year end, and 104% by the end of 2018.

On the other hand, if discount rates were to drop to 3.39% at the end of 2017, and 2.79% by year end 2018, and investment gains were a less robust 3.2% for each year, Milliman sees the funded ratio declining to 75 % by the end of 2017. In this scenario, it could even go down to 69% by the end of 2018.

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In contrast, Wilshire Consulting reports that the funded ratio for US corporate pension plans edged up 0.2% for February, to 83.4%. It is also up about 7% over the year. The Wilshire report is based on the corporate pension plans of S&P 500 companies.

According to the Santa Monica, Calif., investment advisory firm, asset values were up 1.9% for February, outpacing a 1.6% rise in liability values, causing the corporate pension plan funded ratio to go up.

Although both the Milliman corporate funded ratio and the Wilshire corporate funded ratio were based on a drop in discount rates for February, in the Wilshire model, the asset value rise offset the impact of the rise in liability values. In the Milliman model, the impact of the dip in the discount rate was stronger than the impact of investment gains, causing the Milliman corporate funded ratio to drop for February.

Ned McGuire, a member of the Pension Risk Solutions Group of Wilshire Consulting, noted, “This month’s increase was primarily driven by the continued post-election increase in equity markets, lifting the Wilshire 5000 Total Market Index 3.7% during February.”

McGuire expects that if interest rates rise further this year, the liability value of defined benefit corporate pension plans will decline. He expects that if investment returns continue to rise as well, corporate funded ratios will also rise this year.

By Poonkulali Thangavelu

Bitcoin: ETF Dream Deferred

Spec price drops, rebounds after SEC rejects first exchange-traded fund that tracks Bitcoin.

Late last Friday, the SEC rejected an application from Winklevoss Bitcoin Trust for what would have been the first exchange-traded fund that tracks Bitcoin. The highly anticipated announcement ended plans to list and trade shares on the Bats BZX Exchange Inc. The SEC was worried about the currency’s vulnerability to manipulation and the feasibility of surveillance. Bitcoin dropped “12.3 percent to $1,069 following the news from the SEC”. It seems, however, to have no trouble recovering from the stumble. CoinDesk, says Bitcoin opened trading Mar. 14  at $1172.91 This rejection denies many investment institutions the opportunity for more direct exposure to the dynamic currency.

Specifically, the SEC expressed concerns that the proposed activity of the ETF would have fallen short of compliance with Section 6(b)(5) of the Exchange Act and rejected a proposed rule change and specifically called out two major, interrelated drawbacks concerning oversight and fraud prevention:

  • “The significant markets for Bitcoin are unregulated.”
  • The lack of ability to “enter into, the type of surveillance-sharing agreement that has been in place with respect to all previously approved commodity-trust ETPs.”

The planned ETF classified Bitcoin as a commodity, rather than a currency, with shares representing 0.01 BTC. The shares would have tracked the price of bitcoins on the Gemini Exchange, owned by Gemini Trust LLC. Bats BZX was set to collaborate with the Gemini Exchange to monitor the Winklevoss Bitcoin ETF in the same way the exchange keeps an eye on derivatives trading. The Gemini Exchange has been authorized to trade digital currency for two years by the NY State Department of Financial Services (NYSDFS). Also, last May, the NYSDFS gave its approval for the Gemini Exchange to trade Ether, a new and promising cryptocurrency. Ether, short for Ethereum, can impact trading and institutional investors because it allows for the creation and support of smart contracts for trading without a middle man.

Multiple companies submitted Bitcoin ETFs proposals to the regulatory approval process, including one from SolidX Bitcoin Trust, from SolidX Partners Inc, a blockchain technology services company. Tyler and Cameron Winklevoss, famous for their lawsuit  against Mark Zuckerberg, alleging he stole their idea for Facebook, were the first to submit a proposal for an ETF. Their plan for The Winklevoss Bitcoin ETF [Winklevoss Bitcoin Trust (COIN)] had been pending three and half years ago, and experienced more than one decision delay. In the interim, the SEC noted and avowed tighter regulatory surveillance to keep abreast of the burgeoning ETF market, now valued over $3 trillion in net assets. 

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The recent trend to increase transparency for Bitcoin has grown in accordance with interest in trading. Chicago Mercantile Exchange, the leading derivatives marketplace, successfully launched two new tools last November, the CF Bitcoin Reference Rate (BRR) and CME CF Bitcoin Real Time Index (BRTI). The BRR “aggregates the trade flow of the major bitcoin spot exchanges during a specific calculation window into a once-a-day, transparent reference rate of the US dollar price of bitcoin,” according to a CME press release. To do this, CME works with several bitcoin exchanges and trading platforms including Bitfinex, GDAX, itBit, Kraken, and Bitstamp.

 What’s Next?

Bitcoin’s future faces other challenges, including piracy and liquidity risk. Unique partnerships, such as the one between Polychain Capital and venture capital players, Andreessen Horowitz and Union Square Ventures, are forming to seek the rewards in the risk. Blockchain, the technology behind Bitcoin, is also making inroads in other areas of business, including shipping logistics, manufacturing and more.

Cryptocurrencies are decentralized global digital currencies that provide relatively more secure and efficient means of payment and offer. The underlying technology makes tracking assets and transactions more secure. Thusfar, these advantages have attracted interest from banks and other financial institutions. But will major industry players continue to race to prepare for a future defined by this new asset class? Only time will tell.

 By Tasha Williams

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