Milliman sees improvement in largest corporate plans’ funded ratio

The deficit for the 100 largest US corporate pension plans dropped to $247 billion in March, from $275 billion, as their funded ratio rose to 85.3%, from February’s 83.8%, Milliman reports.

The improvement in the Milliman 100 pension funding index comes about as a result of strong asset returns as well as a rise in the discount rates these pension funds use to value their pension liabilities, which is tied to benchmark corporate bond rates, the Seattle-based actuarial consulting firm said.

“The first quarter of 2017 has seen the cumulative asset values of the Milliman 100 pension plans exceed expectations – increasing by $37 billion thanks to strong recurring investment returns – while discount rates are just shy of where they were at the beginning of the year,” according to Zorast Wadia, a Milliman principal. “Overall, funded status has increased by $33 billion during the quarter.”

For March, these corporate pension plans enjoyed an investment return of 1.13%, which boosted their asset values by $11 billion to $1.434 trillion. In addition, these plans saw their projected pension benefit obligation drop by $17 billion in March to $1.681 trillion, as their discount rates rose eight basis points to 3.96%.

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Over the last 12 months, these pensions have enjoyed a return on assets of 8.78%, and these beneficial returns have led to an improvement in their deficit of $128 billion. Discount rates have moved up as well, from 3.78% as of March 2016, to the current 3.96%. Over the year, these corporate plans’ funded ratio has risen from 78.6% to the current 85.3%.

Milliman projects that if these plans attain their 7% expected asset return and maintain their current discount rate of 3.96% through 2017 and 2018, their funded status will improve. At the end of 2017, their pension deficit would drop to $217 billion, and their funded ratio would rise to 87%. By the end of 2018, Milliman anticipates a pension deficit of $173 billion, and a funded ratio of 89.7% for these 100 largest corporate pension plans.

In an optimistic scenario of rising interest rates and asset gains, their funded ratio could even rise to 95% by the end of 2017, and 108% at the end of 2018. And if Milliman’s pessimistic forecast plays out, these pension plans could see their funded ratio drop off to 80% by year end and 73% by the end of 2018.

Tags: deficit, discount rates, pension liabilities, Pension Plans

The California Public Employees’ Retirement System (CalPERS) has approved new pension contribution rates for fiscal year 2017-18, including raising the employer contribution rate to 15.531% from 13.888%, and boosting the member contribution rate to 6.5% from 6%.

“While we recognize that rates will rise due to the change in the discount rate, pension reform helps reduce the risk to the fund and provides vital cost savings for our employers over the long-term,” said Richard Costigan, chair of CalPERS’ finance and administration committee.

The CalPERS board of administration said its decision was spurred by the lowering of the assumed rate of return to 7.375% from 7.5%, a 3.7% increase in member salaries, and last year’s disappointing investment return. The investment return for the fiscal year ending June 30, 2016 was 0.6%, well below the assumed return. CalPERS said “the impact of this investment loss is being recognized for the first time, and will be phased in over five years in accordance with the board policy.”

Combined, the state and school employer’s pension costs for FY 2017-18 are just under $8 billion. The state’s contribution towards pensions will increase by $521 million from $5.4 billion to $5.9 billion from the previous fiscal year. Meanwhile, the schools pool contributions will rise by $342 million to $2 billion from nearly $1.7 billion.

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“We recognize the increases are a concern to many of our employers,” said Rob Feckner, president of the CalPERS Board of Administration, “but today’s decision reflects the reality that we are in a low-return economic climate that is expected to continue for the next five to 10 years.”

CalPERS said that school districts will not see the impact of the discount rate change until fiscal year 2018-19 to allow more time to prepare for the rise in the contribution costs.

The California state pension plan is approximately 65.1% funded, while the schools plan is approximately 71.9% funded as of June 30, 2016. The total CalPERS Fund is estimated to be 65% funded to date. CalPERS is the largest defined-benefit public pension in the U.S., and its total fund market value is approximately $316 billion.

Tags: CalPERS, contribution rate, school districts