US Corporate Pensions’ Funded Status Rises in October

The funded ratio for the 100 largest US corporate pension plans rose to 86.1% during October from 85.4% at the end of September, while their deficit improved by $11 billion primarily due to a 1.08% investment gain, according to actuarial and consulting firm Milliman.

The market value of assets of the pension funds improved by $13 billion during the month to $1.593 trillion from $1.580 trillion at the end of September. The 1.08% investment gain was more than twice the 0.53% monthly median expected investment return during 2018 as reported in the 2019 Milliman Pension Funding Study.

Liabilities for the plans increased by $2 billion as a result of a one basis point decrease in the discount rate to 3.08% as of Oct. 31 from 3.09% at the end of September. October’s month-end discount rate was the second lowest discount rate recorded in the 19 years Milliman has been tracking the funded status of the 100 largest corporate pension funds.

“Over the past 12 months the pension funded ratio has sharply fallen, thanks to the record low interest rate environment,” Zorast Wadia, a principal and consulting actuary at Milliman, said in a release. “However, low interest rates also make borrowing strategies viable if plan sponsors have access to cash. Plan sponsors may want to explore options that take advantage of low rates as one way to fund up their plans.”

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During the last 12 months to October, the deficit of the pension funds has widened by $147 billion despite asset returns of 8.34%. This was the result of falling discount rates, which were down from 4.40% at the same time last year. As a result, the funded ratio of the funds has fallen sharply during the past 12 months from 93.0%.

Milliman said if the funds earn the expected 6.6% median asset return per the 2019 pension funding study, and if the current discount rate of 3.08% is maintained through 2020, the funded status of the surveyed plans would increase to 86.7% by the end of 2019 and 90.3% by the end of 2020. The forecast assumes 2019 and 2020 aggregate annual contributions of $50 billion.

Under an optimistic forecast with interest rates rising to 3.18% by the end of 2019 and 3.78% by the end of 2020, the firm said the funded ratio would surge to 88% by the end of 2019 and 103% by the end of 2020. That assumes robust annual asset gains of 10.6%.

Using a pessimistic forecast with the discount rate falling to 2.98% at the end of 2019 and 2.38% by the end of 2020, the funded ratio would fall to 85% by the end of 2019 and 78% by the end of 2020. That assumes annual asset returns of 2.6%,

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Rising Rates Boosts Corporate Pension Funded Status by $38 billion

Tags: corporate pensions, Funded Status, Milliman, Milliman 100, US, Zorast Wadia

A package of legislation is gaining traction to reduce the funding shortfall of Pennsylvania’s state retirement systems by merging two of its plans. The proposal just passed the Pennsylvania House State Government Committee, and is now headed to the state’s full chamber.

The legislation would merge the investment offices of the State Employees’ Retirement System and the Public School Employees’ Retirement System (SERS), combining their respective $29.6 billion and $53.5 billion pools of capital into an $83 billion Commonwealth Pension Investment Office.

“The primary objective…is to establish a highly professional and expert investment office to serve in a fiduciary capacity the investment needs of SERS and PSERS,” the bill reads.

The bill’s sponsor, Rep. Mike Tobash, a Republican, said that the consolidation of the two systems significantly improves the rates of return to both retirement systems. The GOP controls both houses of the legislature, but not the governor’s chair. “Pennsylvania could certainly improve its performance within our two pension systems, and improved performance means less taxpayers dollars going in to fund the commitments we made to retirees,” he said.

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The leading investment executive for the combined office is yet to be decided. SERS Chief Investment Officer Bryan Lewis resigned from his post in August 2019, and a replacement is expected to be named by June 2020.

In addition to consolidating the two investment offices, legislators are weighing other means of improving their funded ratios. One measure under consideration would give any SERS employer the option to make a lump-sum payment against accrued liabilities. Critics of the bill voiced concerns that the money would have to come from the state’s institutions and employers, such as Penn State University, and would be too unpredictable for calculating budgets and expenses.

The state’s pension plan underwent a new reform earlier this year, creating two retirement options in order to cut taxpayer risk while helping to shore up funding for state pension plans. The plan puts newly hired state employees into a hybrid or a 401(k)-like account. The hybrid plan would keep half a retiree’s money in a traditional, taxpayer-backed defined benefit fund, and the other half into a private 401(k) plan tied to the stock market.

SERS reduced its long-term assumed rate of return earlier this year to 7.125% from 7.25%, in addition to trimming its allocations to hedge funds, citing a shift to what it called “realistic expectations” and shying away from relatively expensive hedge fund fee structures.

Tags: Investments, law, Legislation, merge, Pennsylvania, PSERS, Retirement System, SERS