US Corporate Pension Funding Ratio Rises to 87.1% in 2018

The funded ratio of the 100 largest US corporate pension plans rose to 87.1% in 2018 from 85.8% at the end of 2017, despite investment losses of 2.8%—the worst asset performance since 2008, according to consulting firm Milliman.

“This was the first time in our study’s history that we had a negative asset return and yet corporate pension funding improved,” Zorast Wadia, co-author of Milliman’s Pension Funding Study (PFS), said in a release.

The investment losses reduced plan assets by $43 billion, compared to the expectation that investment gains would add at least $97 billion, which was based on the companies’ long-term investment return assumptions. However, the funded status improved due to a combination of large contributions and the discount rates plan sponsors used to value pension liabilities.

The average discount rate increased by 52 basis points to 4.01% from 3.49%, which was the second-largest one-year increase since Milliman began its annual study 19 years ago. Meanwhile, the pension benefit obligation (PBO) of the 100 largest corporate pension plans declined to $1.66 trillion, down from last year’s record high of $1.8 trillion.

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“We’re accustomed to faulting the low discount rate climate and its negative effect on pension funding,” said Wadia, “but in 2018, discount rate increases as well as large plan sponsor contributions helped dig corporate pensions out of the funding hole created by investments losses.”

In 2018, corporate plan sponsors continued to make large contributions totaling $57.5 billion, although this was down from $62 billion in 2017. Of the 100 largest corporate plan sponsors, 13 employers contributed at least $1 billion, three of which were among the 10 largest contributions in the history of the study. AT&T made a $9.3 billion contribution, General Electric made a $6.8 billion contribution, and Lockheed Martin Corp. made a $5 billion contribution. Employer contributions have totaled nearly $120 billion over the last two years, which exceeds any two-year period in the history of the study.

The funding deficit of the 100 plans improved by $41 billion, ending the year at $215 billion, and 16 of the plans had a funded ratio of at least 100% compared to 15 a year earlier.

Pension expense, which is the charge to a company’s income statement, declined to $16.2 billion in fiscal year 2018 from $20.3 billion in 2017. Milliman said that although this continues a trend of the past several years, it will likely be reversed in 2019.

Pension risk transfer (PRT) programs continued to be a popular cost management move by plan sponsors, as settlement payouts totaled $18.8 billion in 2018 among the Milliman 100 pension plans, compared to $12.7 billion in 2017. And because PRT settlements result in a reduction in future premiums to be collected by the Pension Benefit Guaranty Corporation (PBGC), Milliman said the PBGC reported a large funded status improvement for the corporate pension plans under its custody in the federal fiscal year ending Sept. 30, 2018.

The PBGC recorded a 102% funded ratio for the plans that terminated when the sponsoring employer filed for Chapter 11 insolvency, and were sent to it as the receiving custodian. This is up from the 91% funded status reported at Sept. 30, 2017.

The change was attributed to a large decrease in liabilities caused by a significant increase in the generally conservative interest rates set by the PBGC. Despite an increase in the PBGC flat dollar premium rates, the PBGC’s total premium income decreased 18% in fiscal 2018 to $5 billion from $6.7 billion a year earlier due to the improved funded status of corporate pension plans.

The study also includes an analysis of pension funding across business sectors, and found that plans in the financial services sector have the highest average funding ratio at 100%, while corporate pensions in the industrials, energy, and basic materials sectors have an average funding ratio below 85%.

US Corporate Pensions Will Likely Miss Return Assumptions

Tags: Corporate Funding Ratio, Milliman, PBGC, Pension

An organization of Illinois municipalities seeks to consolidate the state’s 650-plus downstate public safety funds.

The separate funds and their investment assets would be transferred into the Illinois Municipal Retirement Fund. They would create two new omnibus funds: one for all downstate police, the other for all downstate firefighters. By placing their individual accounts into a larger entity, the group’s thinking is that the money would get a better return.

All local pension boards would be reduced to determining pension payouts and disability eligibility. Investments would be managed by the municipal funds as separate accounts, similar to how a bank operates. This means the assets of better funds would not be used to prop up plans in worse shape.

Another proposal of the Illinois Municipal League is to extend the amortization, or debt payment period, by 10 years, from 2040 to 2050. It also wants to cut the funding target requirements from 90% to 80%, calling for a comprehensive study be done regarding the costs and benefits of full consolidation.

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“These bills show the forward-thinking,” wrote Brad Cole, the group’s executive director, in a February email to the legislature and other state officials detailing the bills.

According to the municipal league, Illinois is burdened with $11.1 billion in unfunded liability from its municipal funds. In total, the state has about $133.5 billion of pension debt.

In a meeting last week with Dispatch-Argus-QCOnline.com editorial board members, Cole and Moline Mayor Stephanie Acri said that the league’s studies show that consolidation alone would earn the funds “$1.7 billion,” or “at least 2 more percentage points” from dividends.

“The issue is, we are wasting all this money in duplication,” he said at the meeting. “We’ve got to do something about all the money we’re losing.”

A problem Cole and Acri both pointed out is that more often than not, taxpayers end up paying for retirement fund liabilities in ways such as raised property taxes.

“You hear from people who are concerned about the plowing of their streets who pay a lot in real estate tax, but they don’t understand the nuance of how the real estate tax is invested in the community and in those pensions,” Acri said at the meeting.

Illinois Gov. J.B. Pritzker has created two task forces to determine if consolidation would be the best move.

While consolidating small pension funds has been on the state’s radar for some time, a lack of contribution payments from municipalities has hobbled its finances. Most of the public debt is in the larger plans, such as the teachers and employees’ retirement systems. Politicians have also long-addressed their desire for reform, but little usually happens, and state budgets tend to swallow up what would have been proper payments.

This only grows two things: the unfunded liability, and next year’s contribution promises in the state budget. Pritzker’s current budget calls for $7.1 billion. It is expected to be around $8.2 billion the following fiscal year, increasing to roughly $9 billion by fiscal 2022.

Cole could not be reached for original comment. Acri declined comment.

Illinois’ New Governor Installs Two Pension Taskforces

Tags: Illinois, Illinois Municipal League, Illinois Municipal Retirement Fund, Illinois Pension Consolidation, Pension