Investing July 8, 2011

Interest Rate Rise Lifts Milliman 100 Pension Funding Status in June

July 8, 2011 (PLANSPONSOR.com) - The funded status of the 100 largest corporate defined benefit pension plans improved by $25 billion during June 2011, as measured by the Milliman 100 Pension Funding Index (PFI).

 

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According to the consultancy, June’s funded status amelioration was due primarily to an increase in corporate bond interest rates that are the benchmarks used to value pension liabilities. As of June 30, 2011, the funded ratio advanced to 87.0%, up from 85.5% at the end of May 2011, and the funded status deficit decreased to $186 billion from $211 billion at the end of the previous month.

The projected benefit obligation (PBO), or pension liabilities, decreased by $35 billion during June, moving the Milliman 100 PFI value to $1.427 trillion from $1.462 trillion at the end of May 2011. The change resulted from an increase of 19 basis points in the monthly discount rate to 5.43% for June, from 5.24% for May 2011, according to the report.

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There was an offsetting decrease to the Milliman 100 PFI asset value of $10 billion during June, moving the Milliman 100 PFI asset value to $1.241 trillion, down from $1.251 trillion as of the end of June 2011. That decrease was driven by an investment loss of 2.07% for the month, according to Milliman. By comparison, the Milliman 2011 Pension Funding Study, published in March 2011, reported a 0.64% (8.00% annualized) median expected monthly investment return during 2010.

For the quarter that ended June 30, 2011, the assets had an investment gain of 1.1%. However, the funded status has fallen by $14 billion primarily due to a net interest decline over the past quarter. For these 3 months, the funded ratio of the Milliman 100 companies slipped to 87.0% from 87.7%.

Over the last 12 months, the cumulative asset gain has been 15.0% and the Milliman 100 PFI funded status has increased by $182 billion. For that 12 month period – July 2011 through June 2011 – the funded ratio of the Milliman 100 companies improved to 87.0% from 74.2%.

Projections Screened

If the Milliman 100 PFI companies were to achieve the expected 8.0% median asset return (as per the 2011 pension funding study) for their pension plan portfolios and the current discount rate of 5.43% were to be maintained during years 2011 through 2013, Milliman says that the funded status of the surveyed plans would increase, resulting in a projected pension deficit of $157 billion (funded ratio of 89.0%) by the end of 2011, a projected pension deficit of $97 billion (funded ratio of 93.3%) by the end of 2012, and a projected pension deficit of $34 billion (funded ratio of 97.7%) by the end of 2013. For purposes of this forecast, Milliman says that it assumed 2011-2013 aggregate contributions to remain level with 2010 contribution amounts, which were a record $60 billion.

Under what Milliman described as an optimistic forecast with rising interest rates (reaching 6.33% by the end of 2012 and 6.93% by the end of 2013) and asset gains (12.0% annual returns), the consultancy said that the funded ratio would climb to 110% by the end of 2012 and 129% by the end of 2013. Under what it termed a pessimistic forecast with similar interest rate and asset movements (4.53% discount rate at the end of 2012 and 3.93% by the end of 2013 and 4.0% annual returns), the funded ratio would decline to 78% by the end of 2012 and 72% by the end of 2013.

More information is at http://www.milliman.com/expertise/employee-benefits/products-tools/pension-funding-index/?utm_campaign=PFI062011&utm_source=www.milliman.com&utm_medium=email

Administration July 8, 2011

GASB Makes Pension Reporting Proposals

July 8, 2011 (PLANSPONSOR.com) - The Governmental Accounting Standards Board (GASB) has issued two Exposure Drafts proposing what it termed “improvements to financial reporting of pensions by state and local governments.”

 

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According to GASB, “Accounting and Financial Reporting for Pensions and Financial Reporting for Pension Plans” propose amendments to the existing pension standards to improve how the costs and obligations associated with the pensions that governments provide to their employees are calculated and reported.

The first Exposure Draft, Accounting and Financial Reporting for Pensions (Pension Exposure Draft), primarily relates to reporting by governments that provide pensions to their employees. A second related Exposure Draft, Financial Reporting for Pension Plans, (Pension Plan Exposure Draft), addresses the reporting by the pension plans that administer those benefits.

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“Users of state and local government financial reports have told the GASB that current standards do not provide enough information to adequately understand the cost and the liability for benefits promised to active and retired employees,” stated GASB Chairman Robert H. Attmore. “The proposals contained in these Exposure Drafts are the result of years of research and extensive deliberations by the Board to address these issues and make financial reporting of pensions more transparent, comparable and useful to citizens, legislators, and bond analysts.”

Attmore added “It is important to note that these proposals relate to accounting and financial reporting, not to how governments approach the funding of their pension plans. Pension funding is a policy decision made by government officials.”

 

The Pensions Exposure Draft proposes that governments be required to report in their statement of financial position a net pension liability; the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside in a qualified trust to pay benefits to current employees, retirees, and their beneficiaries. According to GASB, it also proposes significant changes to how a government would calculate its total pension liability and pension expense. These changes include:

  • Immediate recognition of more components of pension expense than is currently required, including the effect on the pension liability of changes in benefit terms, rather than deferral and amortization over as many as 30 years which is common for funding purposes.
  • Use of a discount rate that applies (a) the expected long-term rate of return on pension plan investments for which plan assets are expected to be available to make projected benefit payments and (b) the interest rate on a tax-exempt 30-year AA-or-higher rated municipal bond index to projected benefit payments for which plan assets are not expected to be available for long-term investment in a qualified trust.
  • A single actuarial cost allocation method—“entry age normal”—rather than the current choice among six actuarial cost methods. Requiring governments participating in cost-sharing multiple employer pension plans to record a liability equal to their proportionate share of any net pension liability for the cost-sharing plan as a whole.
  • Requiring governments in all types of covered pension plans to present more extensive note disclosures and required supplementary information.

According to GASB, the Pension Exposure Draft addresses situations in which another entity contributes to a government’s pension plan on behalf of the employer and it also addresses accounting and financial reporting for employers that provide pensions through defined contribution plans. 

The Pension Plan Exposure Draft, which GASB said addresses financial reporting for plans that are administered through qualified trusts, outlines the basic framework for the separately issued financial reports of defined benefit pension plans. It also details proposed note disclosure requirements for defined contribution pension plans, according to GASB.

The Exposure Drafts, including instructions on how to submit written comments, are available for download at www.gasb.org.

The deadline for submitting written comments is September 30, 2011.

In addition, the GASB has released a plain-language supplement to assist non-accountant users of financial statements in commenting on the Pension Exposure Draft. The supplement is also available for download at www.gasb.org.

The GASB will host public hearings on the Exposure Drafts on October 3, October 13, and October 20, 2011, and user discussion forums on October 4, 14, and 21. Locations and other details, including instructions for registering to participate, are explained in the Exposure Drafts, according to a press release. 

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