An Optimistic or Pessimistic Year for DB Funding?

Milliman forecasts both scenarios.

As other consultants have noted, Milliman’s Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans, finds defined benefit (DB) plan funded status came almost full-circle in 2016.

In December, the funded status for these pension plans improved by $13 billion due to robust investment returns of 1.17%, and the funded ratio increased from 80.3% to 81.0% to close out the year.

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Milliman notes that overall, interest rate declines characterized 2016, with the end of August marking the lowest discount rate (at 3.32%) in the PFI’s 16-year history. Since that point and coincident with the conclusion of the U.S. presidential election, interest rates have steadily increased. 

So, looking forward, under an optimistic forecast with rising interest rates (reaching 4.55% by the end of 2017 and 5.15% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 92% by the end of 2017 and 105% by the end of 2018. However, under a pessimistic forecast with similar interest rate and asset movements (3.45% discount rate at the end of 2017 and 2.85% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 75% by the end of 2017 and 69% by the end of 2018.

“Going into 2017, rumors of potential multiple interest rate hikes by the Federal Reserve have plan sponsors and pension practitioners closely watching market activity. If interest rates continue to climb, the funded ratio could make some major gains,” says Zorast Wadia, co-author of the Milliman 100 Pension Funding Index.

To view the complete Pension Funding Index, go to http://us.milliman.com/PFI.

401(k) Plans Cautious About Adding Guaranteed Income Products

The top concern plan sponsors expressed about adding a retirement income guaranteed product to the plan was fiduciary exposure, a survey from the PSCA found.

Only 5% of 401(k) plans offer a retirement income guarantee product in the plan, according to the Plan Sponsor Council of America’s (PSCA)’s 59th Survey of Profit Sharing and 401(k) Plans

Large plans were more likely to offer an income guarantee product (5.7%) versus small plans (4.4%). The types of retirement income guarantee products offered included guaranteed minimum withdrawal benefits (GMWB)/guaranteed lifetime withdrawal benefits (GLWB) (40%), traditional fixed annuities (33%), variable annuities (33%), managed account services (26.6%), managed payout funds (13.3%) and deferred/longevity annuities (13.3%).

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However, 12.1% of respondents indicated their organizations are considering adding a retirement income guarantee product, PSCA reports, with large plans (18%) expressing more interest than small plans (7%).

“While guaranteed income products such as lifetime annuities have been in the headlines, plan sponsors are proceeding with caution,” says Steve McCaffrey, senior counsel II at National Grid and PSCA’s board chairman. “Plan sponsors continue to have questions about the role these products play as part of a plan, and the challenges and potential unintended consequences associated with them.”

The top concern plan sponsors expressed about adding a retirement income guaranteed product to the plan was fiduciary exposure (38.3%).  Other concerns included high costs (33.3%), operational hurdles such as recordkeeping issues (32.9%), non-portability (28.9%), risk exposure from the insurer guaranteeing the product (26.5%), lack of interest from participants (17.3%), and “not the role of the employer” to provide lifetime income products (13.3%). 

Not all plan sponsors had concerns; 34.5% expressed that they just had not added an income guaranteed product yet.

The 2016 PLANSPONSOR Defined Contribution Survey also found low usage of lifetime income products in defined contribution (DC) plans overall, but greater usage among 403(b) plans

PSCA’s 59th Annual Survey reflects the 2015 plan-year experience of 614 DC plan sponsors. The survey is available at https://www.psca.org/research.

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