Corporate Pensions: Mixed Results in 2016

Corporate pension plans showed a slight drop in funding in 2016, but there was some good news as well — at least if the 100 largest corporate plans Milliman studies are any indication.

Funding Ratios

The 2017 Milliman Corporate Funding Study, which looks at the 100 U.S. public companies with the largest pension plan assets for which a 2016 annual report was released by March 5, 2017, revealed more than just the funding ratio. The funding level was largely stable, but a closer look begs to differ.

The study says that corporate funding levels fell very slightly since 2015, and are largely unchanged for three consecutive years:

2016: 81.2%
2015: 81.9%
2014: 81.6%

However, while the 0.7% drop in the funding ratio — not even 1% — seems small, it really is not. It actually represents a $22 billion with a big drop in funding status.

Good News

Milliman also reports good news for the 100 plans in its study:

• In fiscal year (FY) 2016, the pension trusts’ investment return was 8.4%; the average return expectation for the Milliman 100 companies was 7.0%.

• Employers’ plan contributions in FY 2016 amounted to almost $43 billion, a 38% jump from the FY 2015 level of $31 billion.

• For the second fiscal year in a row, lower future life expectancy reduced the actuarially determined benefit obligations for six Milliman 100 companies by almost $4 billion.

• FY 2016 pension expenses fell by 7.6% to almost $31 billion.

Other Developments

The study also says that almost half of the companies researched have adopted, or plan to adopt, a “spot rate” approach for calculating pension expense. And it shows continued interest in pension risk transfer transactions and strategies from the plan sponsors to insurance companies.

Crystal Ball

Milliman says that in FY 2017, it expects the following:

• Employer contributions will stay at their current levels.

• Pension expenses will drop, but will be dampened by a drop in discount rates.

• Projected benefit obligation (PBO) losses are expected at the end of 2017 because of spot rate methods for determining the interest cost component of pension expense. However, refinements in mortality assumptions will bring PBO gains.

• Pension risk transfer activities will continue in 2017; however, that will depend on the discount rates and asset returns.