Private-sector pension plans showed mixed results in 2020. Recent reports indicate that is the case when considering funding levels as well as how the funds in them are invested.
Funding
In Milliman’s Pension Funding Index, January 2021, Zorast Wadia, a principal and consulting actuary with Milliman’s New York office, and Charles J. Clark, a director of Milliman’s Employee Benefits Research Group, report mixed results for those 100 top private-sector DB plans—the Milliman 100—in 2020. The results are similar to those Willis Towers Watson has reported.
Funded status. Milliman reports that for those 100 top DB plans, the funded ratio stood at 88.2%, an improvement since November of 1.7 percentage points. This year-end result was 1.2 percentage points above the 87% rate Willis Towers reported for private-sector pension plans in general.
Discount Rates. The Milliman 100 discount rates fell by 74 basis points in 2020; at the end of 2019, they stood at 3.2%, and 2.46% as 2020 came to a close. Wadia and Clark say that this is the lowest year-end discount rate and second lowest monthly discount rate ever recorded in the 20 years Milliman has been measuring funding for those pension plans. NEPC reports that it found that the drop in discount rates in 2020 had an especially pronounced effect on liabilities of longer-duration open plans.
Investments
LDI vs. Equities. NEPC found that pension plans focused on liability-driven investments (LDI) that hedge interest rate risk with long-duration bonds performed better than did longer-duration total return plans that focused on equities more heavily in their investment allocations.
Asset Performance. Wadia and Clark report that the annual investment gain for 2020 for those top 100 plans was lower than the 15.66% of 2019. Nonetheless, the annual investment gain was 11.72% for 2020, far exceeding the 6.5% Milliman had expected. They write that 2020 was “very favorable” for fixed income and equity investment, just as 2019 had been.
Cumulative Investment Return vs. Liability Return. The Milliman report says that the cumulative investment gain was 11.72% for 2020, while the cumulative liability return—the increase in the projected benefit obligation—was 13.73%.
Assets vs. Liabilities. Plan assets for the 100 plans grew by $125 billion in 2020, the Milliman report says; however, plan liabilities increased by $175 billion, for a deficit of $50 billion.
Interconnectedness
NEPC suggests that the 2020 results show that these trends are entwined, and writes that the connections between equities, Treasury rates and credit highlight the effects of liability duration and asset allocation on funded status. And its report notes that use of LDI to improve funded status in 2020 underscores how effective their use is to increase stability and manage risk.
- Log in to post comments