US Corporate Pension Funding Plummets $65 Billion in May

The 100 largest US corporate pension plans saw their funded status plunge $65 billion in May, due to a combination of poor investment returns and a decrease in the benchmark corporate bond interest rates used to value pension liabilities, according to actuarial and consulting firm Milliman. The decrease caused the plans’ funding ratio to fall to 87.9% from 91.4% at the end of April.

“May was a dismal month for corporate pensions, hitting plans with a double-whammy of poor equity returns and declining discount rates,” said Zorast Wadia, co-author of the Milliman 100 PFI, which tracks the 100 largest US corporate pension plans. “In fact, May’s heavy losses bring pension funding lower than where it was at the start of 2019, and mark the third-largest monthly funding decline in the past five years.”

Only January 2015 and December 2018 saw larger declines, when the PFI lost $70 billion and $97 billion, respectively.

The plans’ cumulative investment return for the month was a loss of 0.74%, which resulted in a $15 billion decrease in the market value of their assets to $1.521 trillion at the end of May. Meanwhile, the deficit widened to $210 billion from $145 billion at the end of April.

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The projected benefit obligation of the Milliman 100 PFI increased $50 billion during May to $1.731 trillion, which was due to a decrease of 24 basis points in the monthly discount rate to 3.61% for May from 3.85% in April. This was the lowest discount rate since December 2017 when it was 3.53%.

“While we don’t forecast interest rates,” said the report, “the gradual decrease in rates has been quite noticeable in the financial markets in the last few months.”

Over the last 12 months, from June 2018 to May 2019, the cumulative asset gain for the 100 largest corporate pension plans has been 3.72%, and the Milliman 100 PFI funded status deficit has grown by $68 billion. The main reason given for the worsening of the funded status deficit was a decline in discount rates over the past 12 months. During that period, Milliman said discount rates decreased to 3.61% at the end of May, from 3.99% at the end of May 2018, while the funded ratio of the Milliman 100 companies decreased to 87.9% from 91.5% during that time.

Milliman said that if it the companies in its index were to achieve the expected 6.6% median asset return per its 2019 pension funding study, and if the current discount rate of 3.61% were maintained through 2020, the funded status of the plans would increase to 89.8% by the end of 2019, and 93.4% by the end of 2020. The forecast assumes aggregate annual contributions of $50 billion for 2019 and 2020.

The firm also said that under an optimistic forecast with interest rates rising to 3.96% by the end of 2019, and 4.56% by the end of 2020, with 10.6% annual asset returns, the funded ratio would climb to 96% by the end of this year and 111% by the end of 2020. However, under a pessimistic forecast of a 3.26% discount rate at the end of 2019, and 2.66% by the end of 2020, with only 2.6% annual returns, the funded ratio would decline to 84% by the end of this year, and 77% by the end of 2020.

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Tags: Corporate Pension, Funding Ratio, Milliman, Pension

A subsidiary of the Industrial and Commercial Bank of China has agreed to pay more than $42 million to settle charges by the Securities and Exchange Commission (SEC) of improper handling of “pre-released” American Depositary Receipts (ADRs). It is the largest recovery against a broker in the SEC’s ongoing investigation of ADR practices, which has resulted in settlements totaling more than $414 million with 10 financial institutions.

The SEC’s order alleged that the Industrial and Commercial Bank of China Financial Services LLC (ICBCFS) improperly obtained pre-released ADRs from depositary banks when it should have known that neither the firm nor its customers owned the foreign shares needed to support those ADRs.

ADRs require an equal number of foreign shares to be held at a depositary bank, and the practice of pre-releasing ADRs allows them to be issued without the deposit of foreign shares, as long as the brokers receiving them have an agreement with a depositary bank, and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADRs represent.

Improperly obtaining the pre-released ADRs inflates the total number of a foreign issuer’s tradeable securities, and the SEC’s order said that as a result of its actions, ICBCFS facilitated short selling and enabled the settlement of trades with ADRs that were not actually backed by ordinary shares.

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“With these charges, ICBCFS is being held accountable for its unlawful ADR practices,” said Sanjay Wadhwa, senior associate director of the SEC’s New York regional office. “By falsely representing that the firm or its customers owned the foreign shares to support pre-release transactions, ICBCFS often played the role of middleman between depositary banks and other market participants in the issuance of what amounted to phantom securities.”

The SEC said that ICBCFS’s securities lending desk personnel also engaged in hundreds of prerelease transactions involving the sponsored ADRs of foreign issuers that were scheduled to pay dividends. It said the brokers who lent ICBCFS the pre-released ADRs sought to profit by holding ordinary shares in a tax-advantaged situation if the tax savings were higher than the costs of borrowing or acquiring the ordinary shares at dividend time. ICBCFS, in turn, allegedly profited from these transactions by lending the pre-released ADRs at a higher rate than the rate at which it obtained the ADRs.

“ICBCFS failed to establish and implement effective policies and procedures to address whether ICBCFS’s associated persons complied with the firm’s obligations in connection with pre-release transactions,” said the order. “As a result, ICBCFS’s supervisory policies and procedures were not reasonably designed and implemented to provide effective oversight of associated persons to prevent and detect their violations of Securities Act.”

Although the bank neither admitted nor denied the SEC’s findings, it agreed to be censured, return nearly $24 million in ill-gotten gains, and pay $4.4 million in prejudgment interest on top of a $14.3 million penalty.

In a separate case, ICBCFS also pleaded guilty to an antitrust charge and was sentenced to pay a criminal fine of more than $3 million for its involvement in a bid-rigging conspiracy involving certain financial instruments, according to the US Department of Justice. As part of a guilty plea, ICBCFS admitted that for more than two years, it conspired with other institutions and individuals to submit rigged bids to borrow pre-released ADRs.

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Tags: ADR, China, Industrial and Commercial Bank of China, SEC

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