The 2018 edition of the Milliman Corporate Pension Funding
Study (PFS) is our 18th annual analysis of the financial
disclosures of the 100 largest corporate defined benefit (DB)
pension plan sponsors. These 100 companies are ranked highest
to lowest by the value of their pension assets reported to the
public, to shareholders, and to the U.S. federal agencies that
have an interest in such disclosures.
We’re pleased to report that during 2017 the private single-employer
defined benefit plans of the Milliman 100 companies
made significant funding improvements. The Milliman 100
funded ratio settled at 86.0%, an improvement from the year-end
2016 funded ratio of 81.1%. The funding deficit dropped by
a noteworthy $72 billion, ending the year at $252 billion.
FIGURE 1: DISTRIBUTION BY FUNDED RATIO
Corporate plan sponsors made the strategic decision in
fiscal year (FY) 2017 to contribute $62 billion to their plans,
pushing 2017’s total assets to a record $1.55 trillion. This year’s
contributions represent a 45.0% increase from the $42.6 billion
contributed in 2016, and are tied with 2012 for the highest
amount contributed to the Milliman 100. Seventeen of these
employers contributed at least $1 billion, with seven of them
contributing more than $2 billion.
Soaring global equity markets contributed to very strong
investment returns in 2017 with the average plan earning about
12.7%. Overall, investment returns added $175 billion to plan
assets ($92 billion was expected based on the companies’ long
term investment return assumptions, while the excess above the
expected was $83 billion).
The impact on the income statement was just as dramatic.
FY2017 pension expense (the charge to the income statement
under Accounting Standards Codification Subtopic 715)
decreased 36.6% to $19.7 billion from $31.1 billion in FY2016.
An additional factor contributing to the improvement in funded
ratios was a modest decline in life expectancy assumptions
due to participants and pensioners not living quite as long as
previously predicted by the Society of Actuaries. This reduced
the actuarial present value of the pension benefits, referred to
as the projected benefit obligation (PBO).
Despite the strong equity markets and higher short-term
interest rates, the one metric over which an employer has
no control, the discount rate, declined during 2017 to end
the year at 3.60%, down 37 basis points from the 3.97% rate
a year earlier. As a result, the PBO of the Milliman 100 plans
increased to an all-time high of $1.80 trillion (an $82 billion
increase since the end of 2016). Note that the record $62 billion
in contributions still left a $20 billion hole to be covered, which
investment returns helped to overcome.
During 2017, pension settlements or pension risk transfer (PRT)
programs matured with an apparent overall acceptance by the
participants and the financial markets. We are unaware of any
significant litigation by participant plaintiffs claiming they were
harmed or otherwise disadvantaged by the actions taken by
an employer to effect a PRT. We also have observed that the
number of high-quality insurance companies chosen to accept the
responsibilities to pay the agreed-to pension claims has broadened.
While we make no inference on the process of how employers
are choosing these insurers, the selection is clearly defined in U.S.
Department of Labor (DOL) rules as a fiduciary obligation.
Underneath the effect of PRT, of course, is the measurable
reductions in future premiums to be collected by the Pension
Benefit Guaranty Corporation (PBGC), which itself experienced
funded status gains in the federal fiscal year ending September
30, 2017. The PBGC recorded a 91% funded ratio for the plans that terminated (when the sponsoring employer filed for Chapter
11 insolvency) and were sent to PBGC as the receiving custodian.
In 2017, PBGC total premium income exceeded pension claims
by over $1 billion for the first time. A discussion of PBGC
considerations is included in this report.
Last, we acknowledge that, as of this publication date, there
have been four new tax laws, the Tax Cut and Jobs Act of 2017
(December 22, 2017), the Continuing Appropriations Act, 2018
(January 22, 2018), the Bipartisan Budget Act of 2018
(February 8, 2018), and the Consolidated Appropriations Act,
2018 (March 23, 2018).
None of these four laws affected the ERISA laws governing the
provisions, compliance, or administration of single-employer
defined benefit pension plans. We do know that the reduction
of the corporate marginal tax rates to 21% in 2018 from 35% in
2017 may cause plan sponsors to implement certain strategies
concerning the recognition of the contribution in a specific
tax year. It is possible that many plan sponsors anticipated the
lowering of corporate tax deductibility of contributions made
for plan years after 2017. This could have been a major driver
for the increase in 2017 plan sponsor contributions relative to
the past few years. The trend in higher contributions may also
continue into the 2018 calendar year, as plan sponsors with
calendar year plans can continue to designate contributions
toward the 2017 plan year and hence claim higher tax
deductions, as long as such contributions are made before
September 15, 2018. We will be following this activity carefully.
We discuss in more detail the results of our study below:
- Three companies exited the Milliman 100 study due
to mergers and are no longer part of the Milliman 100
companies covered in the 2018 PFS:
- Reynolds American was acquired by British
American Tobacco.
- Dow Chemical and DuPont merged and formed
DowDuPont, which is included in our study.
- Three companies newly joined the Milliman 100:
DowDuPont, Edison International, and Rockwell Automation
Forty-three of the Milliman 100 companies in this 2018 PFS
indicated they have adopted or plan to adopt a “spot rate”
approach for calculating pension expense. Forty-six companies
included such disclosures for our 2017 PFS.
Pension risk transfer transactions from the plan sponsors
to insurance companies continued in 2017. FY2017 pension
risk settlement payments to former—but not yet retired—
participants continued as well. We’ve estimated that the
sum of the pension risk transfers to insurance companies
(sometimes referred to as “pension lift-outs”) and the
settlement payments totaled about $12.7 billion, compared
with $13.6 billion in FY2016. Examples among Milliman 100
companies are: Hartford Financial ($1.6 billion), International
Paper ($1.3 billion), and DowDuPont ($1.2 billion). These
pension risk transfer strategies also relieve the plan sponsor
of the PBGC premium payments that are required for the
former employees, who are part of the participant head
count. The downside of these pension risk transfers is the
opportunity costs in potential excess investment earnings,
as witnessed in 2017, and the premium or additional cost
sponsors have to bear beyond ordinary funding requirements
to transfer pension risk to third parties.
FIGURE 2: HIGHLIGHTS (FIGURES IN $ BILLION)
In addition to defined benefit pension plans, the PFS has
been tracking the actuarial obligations of postretirement
healthcare benefits. FY2016 marked the first year that the
aggregate reporting of these accumulated postretirement
benefit obligations (APBOs) was under $200 billion (at about
$199.1 billion). This trend continued in FY2017, with the APBOs
decreasing an additional $3.1 billion to $196.0 billion. This is
consistent with the trend by plan sponsors over the last decade
of divesting other postemployment benefits (OPEB) liabilities.
As we write this report in April 2018, we acknowledge that our
year-end 2017 results do not reflect the changes in the financial
markets since January 1.
The most significant factors offsetting the adverse effect of
the decrease in discount rates on the funded ratio were the
favorable investment returns, and an increase in employer
contributions during 2017:
1. The actual return on the pension trusts was 12.7%, when
the expectation was an investment return of 6.8%—an
investment gain of $83 billion.
For the nine years 2009 to 2017, there has always been a net
investment increase over the asset value at the start of the
year and, except for 2011 and 2015, pension plan investment
gains have exceeded the expected return set at the start
of the fiscal year. We also note that, in those nine years,
pension plan asset allocations to equities decreased to about
36.0%, from about 46.0%, while fixed income allocation has
increased to about 45.0% from about 36.0%.
2. Employers increased 2017 cash contributions by $19 billion
compared with 2016. About $62 billion was contributed
in 2017, compared with about $43 billion in 2016. Among
other contribution strategies, there may have been a desire
to reduce the PBGC premium applicable to pension plan
underfunding and to leverage the higher tax deductions on
2017 contributions under tax reform changes.
Pension expense in 2017 declined by $11.4 billion to
$19.7 billion, from $31.1 billion in 2016. One may reasonably
conclude that pension expense will decrease in 2018 because
of the favorable 2017 asset performance. However, the effect
of lower discount rates and possible plan settlements will also
need to be considered.
Future reductions in pension expense can result from changes
in the assumptions under which pension expense is calculated.
Forty-three of the Milliman 100 companies indicated in Form
10-K that they have adopted or plan to adopt a “spot rate”
approach to calculate the interest cost component of pension
expense for some or all of their plans, which is a refined use of
the individual “spot” interest rates on the corporate bond yield
curve used to develop the projected benefit obligation (PBO).
De-risking transactions continued in 2017, and the estimated
dollar volume of pension risk transfers collected from the
accounting disclosures was lower in 2017 ($12.7 billion)
compared with 2016 ($13.6 billion). Note that the federal DOL
prefers the use of “pension risk transfer” (PRT) when referring
to these transactions in which a complete divestiture of DB
plan obligations to participants or to insurance companies
occurs. PRT transactions may continue in 2018, spurred by the
significant increases in the premiums payable to the PBGC.
Very strong year for investment
returns—especially for plans with
significant allocations to equities
With the average discount rate falling 43 basis points for the
calendar fiscal year plans, we estimate that their pension
liabilities increased approximately 10% on an economic basis
(due to the passage of time and changes to discount rates,
ignoring benefit payments and accruals). Plans with significant
allocations to fixed income as part of a liability-driven
investment (LDI) strategy typically have allocations to longduration
high-quality bonds. Returns on these bonds in 2017
were in the low double digits and did their job of tracking the
increase to pension liabilities. But equities, both U.S. and non-
U.S., performed even better than long-duration bonds in 2017
and rewarded those plans with large equity allocations.
FIGURE 3: ESTIMATED RATES OF RETURN EARNED IN 2017 FOR
THE 87 PLANS WITH CALENDAR FISCAL YEARS BY THEIR
ALLOCATION TO EQUITIES
FIGURE 4: ESTIMATED RATES OF RETURN EARNED IN 2017 FOR
THE 87 PLANS WITH CALENDAR FISCAL YEARS BY THEIR
ALLOCATION TO FIXED INCOME
Rates of return earned in 2017 for the 87 pension plans with
calendar fiscal years ranged from 4.6% to 19.7%, with an
average of 13.6%. Returns mostly fell in the 8.0% to 18.0% range
(77 plans), with five plans earning returns below 8.0% and five
plans earning returns above 18.0%. Generally, plans with greater
allocations to equities earned higher returns. The eight plans
with equity allocations of at least 60% earned an average return
of 17.0% while the 17 plans with equity allocations below 25%
earned an average return of 10.8%.
FIGURE 5: FIXED-INCOME ALLOCATION 50% OR HIGHER
(CALENDAR YEAR FISCAL YEARS ONLY)
Equity allocations in the pension portfolios fell slightly to 36.0%
by the end of 2017. The companies comprising the Milliman
PFS have generally shifted toward higher allocations to fixed
income investments. This trend has surfaced as plan sponsors
reconfigured allocations to de-risk their pension plans over the
past several years.
The actual asset return for the plan sponsor with the highest
allocation to equities (81.9%) was 14.1%, which was better than
the return of 7.7% for the plan sponsor with the lowest allocation
to equities (7.1%) in 2017. The highest asset return among all
companies with calendar year fiscal years was 19.7%, while the
lowest was 4.6%.
In prior years, investment allocations made by plan sponsors
had showed a trend toward implementing LDI strategies.
Generally, this involves shifting more assets into fixed income
positions. This trend appears to have stabilized in 2017. The
percentage of pension fund assets allocated to equities, fixed
income, and other investments was 36.0%, 45.2%, and 18.8%,
respectively, at the end of 2017, compared with 36.2%, 44.0%,
and 19.8%, respectively, at the end of 2016.
Unlike in 2016, when plans with high allocations to fixed income
(over 50%) outperformed the other plans (9.9% average return
compared with 8.4%), in 2017 the plans with high allocations to
fixed income underperformed the other plans (10.8% compared
with 14.6%).
Over the last five years, the plans with consistently high
allocations to fixed income have slightly underperformed the
other plans while experiencing lower funded ratio volatility
rates. Among the 87 companies in the Milliman PFS with
calendar year fiscal years, 21 pension plans had fixed income
allocations greater than 40.0% at the end of 2012 and maintained
an allocation of at least 40.0% to fixed income through 2017. Over
this five-year period, these 21 plans experienced lower funded
ratio volatility rates than the other 66 plans (an average funded
ratio volatility of 4.6% versus 6.2% for the other 66 plans) while
earning a slightly lower five-year annualized rate of return (an
average of 7.9% versus 8.9%). Contrary to 2016, when these 21
plans outperformed relative to the other 66 plans (9.8% average
return versus 8.4%), they underperformed the other plans in 2017
(10.4% average return versus 14.6%).
FIGURE 6: ESTIMATED AVERAGE RATE OF RETURN BY ALLOCATION
TO FIXED INCOME, 2015-2017
Overall allocations to equities decreased during 2017, resulting
in an average allocation of 36.0%—the lowest equity allocation
in the 18-year history of the Milliman PFS. Two of the 100
companies had increases to their equity allocations of more
than 10.0% in 2017. Only one company decreased its equity
allocation by more than 10.0% in 2017, compared with three
companies in 2016, four in 2015, 11 in 2014, five in 2013, three in
2012, and 11 in 2011.
Overall allocations to fixed income increased in 2017, resulting
in an average allocation of 45.2%. Only one company had a
decrease of more than 10.0% in its fixed income allocation. Three
companies, however, increased their fixed income allocations
by more than 10.0% in 2017, compared with five in 2016, three in
2015, seven in 2014, four in 2013, two in 2012, and six in 2011.
FIGURE 7: ASSET ALLOCATION OVER TIME
Other asset classes include real estate, private equity, hedge
funds, commodities, and cash equivalents. More specific details
on how investments are allocated to the other categories are
generally not available in the companies’ U.S. Securities and
Exchange Commission (SEC) filings. Overall, allocations to
other asset classes remained stable in 2017. Five companies
increased their allocations by 5.0% or more to other asset
classes during 2017.
For comparison purposes, we have looked at historical changes
since 2005, the first year when the Milliman 100 companies
consistently made allocation information available. The allocation
to equities was down from 61.7% at the end of 2005 and the
allocation to fixed income instruments was up from 28.6% at the
end of 2005. The percentage of investments in other asset classes
was also up from the 9.7% allocation at the end of 2005.
PRT activities continue
Similar to the past few years, plan sponsors continued to execute
pension risk transfer (PRT) activities in 2017 as a way of divesting
pension obligations from their DB plans and corporate balance
sheets. Large-scale pension buyout programs were transacted
for three of the Milliman 100 companies, as pension assets and
liabilities were transferred to insurance companies. DowDuPont,
International Paper, and Hartford Financial reported transactions
of $1.2 billion, $1.3 billion, and $1.6 billion, respectively.
The 2017 PRT market was slightly less active when compared with
the 2016 market. Extracting the dollar volume of PRT activities
from Form 10-K is an estimate and it appears that the reported
dollar volume in 2017 was $12.7 billion, a decrease of $0.9 billion
compared with the 2016 reported dollar volume of $13.6 billion.
PRTs are deemed by plan sponsors to be an effective way to reduce
a pension plan’s balance sheet footprint, but generally they have an
adverse effect on the plan’s funded status, as assets paid to transfer
accrued pension liabilities are higher than the corresponding
actuarial liabilities that are extinguished from plans. Much of
this incongruity stems from Internal Revenue Service (IRS)
pension plan valuation rules differing from an insurance
company’s underwriting assessment of these same liabilities.
In 2016, we reported that a more prevalent de-risking measure
came in the form of a “lump-sum window” program, in which
some plan sponsors settled the pension obligation by distributing
a payment to a specific group of former participants. However,
the IRS issued Notice 2015-49, which effectively and permanently
ended the ability of a plan sponsor to offer lump-sum settlements
to retirees or their surviving beneficiaries who were collecting
annuities. On the other hand, lump-sum offerings via windows to
terminated vested plan participants continued in 2017 and more
are expected in 2018 as well, as plan sponsors continue to transfer
pension liabilities in order to lower PBGC variable rate premiums.
The PBGC flat dollar amount increases to $74 in 2018 from
$69 in 2017 and $64 in 2016. The variable rate premium has
increased to 3.8% of the pension plan’s PBGC-funded status
deficit in 2018, from 3.4% of the 2017 deficit. (PBGC’s funded
status deficit uses interest rates and mortality assumptions that
are different from those used to determine the funded status of
the Milliman 100 companies.)
The 2017 funded ratio of 86.0% was higher than we reported
in the January 2018 Milliman 100 Pension Funding Index (PFI).
The January 2018 PFI funded ratio of 84.1% was based on data collected for the 2017 Milliman Pension Funding Study. This
revised funded ratio of 86.0% from our current study reflects
the collection and collation of publicly available information.
Investment returns and contributions during 2017 were higher
than we had forecasted, both key factors for the higher funded
ratio. The higher-than-expected cash contributions during
2017 are likely in response to rising PBGC premiums as well as
the added advantage of taking the tax deduction in 2017 at the
higher applicable tax rates as a result of tax reform changes.
Impact of decreasing discount rates
evident in 2017 financial statements
of the Milliman 100 companies
Discount rates used to measure plan obligations, determined
by reference to high-quality corporate bonds, decreased during
2017, thereby increasing liabilities and continuing the trend
from the prior year. The median discount rate decreased to
3.60% at the end of 2017 from 3.97% in 2016. The 3.60% discount
rate at the end of 2017 was the lowest in the 18-year history of
the Milliman PFS. Discount rates have generally declined from
7.63% at the end of 1999.
The impact of the decreasing discount rates in 2017 and
increased PBO was more than offset with a favorable investment
gain of 12.7%. This resulted in an increase in the funded status.
The 2017 funding deficit of $252.1 billion is a $72.4 billion decrease
over the year-end 2016 funding deficit.
FIGURE 8: PENSION SURPLUS/(DEFICIT)
Pension expense—the charge to company earnings—decreased
to $19.7 billion in 2017 as compared with $31.1 billion during fiscal
year 2016, an $11.4 billion decrease. The peak level of pension
expense occurred in 2012, when it was $56.3 billion. In addition,
43 of the Milliman 100 companies indicated that they have
adopted or plan to adopt a “spot rate” approach for estimating
the service and interest cost components of net periodic benefit
costs. This approach is likely to produce a pension expense
savings in the near term. In spite of the decrease in discount
rates during 2017 and corresponding higher PBO and service
costs, the 2018 pension expense is likely to decrease due to the
investment gains experienced during 2017.
The “spot rate” approach is a refined use of the individual
“spot” interest rates on the corporate bond yield curve used
to develop the actuarial liabilities or PBO. This contrasts with
the measurement of PBO utilizing a customized bond matching
model. The plan sponsor can choose to use only one of the
valuation methodologies, and cannot change it each year unless
there is agreement with the auditors to do so.
For an upwardly sloping yield curve, the use of the “spot rate”
method is expected to lower the “interest cost” component
of pension expense, thus lowering the total pension expense
in comparison with using the former single-weighted
average discount rate methodology. This method leads to an
expectation of PBO losses when the PBO is remeasured at the
end of fiscal year 2018 for pension disclosure.
FIGURE 9: PLAN ASSETS AND OBLIGATIONS
The effect of a decrease of 37 basis points in discount rates was
partially offset by the favorable investment returns during 2017,
continued revisions to life expectancy assumptions, and the
impact of PRT activity.
The net 4.8% increase in pension obligations generated by
the decrease in discount rates, revisions to life expectancy
assumptions used to measure pension plan obligations (at a
median rate of 3.60% at year-end 2017, down 37 basis points
from 3.97% at year-end 2016), and PRT activity resulted in a
liability increase of $81.9 billion. Pension liabilities for IBM
increased above the $100 billion pension obligation mark in
2017, but a favorable investment return of 8.4% helped its plan
to improve its funded status to 92.1% at the end of 2017, up from
89.9% at the end of 2016.
The 12.7% investment gain (actual weighted average return
on assets during 2017) resulted in an increase of $154.3 billion
in the market value of plan assets when combined with the
higher contributions, and approximately $13 billion paid out
in annuity purchases or lump-sum settlements. The Milliman
100 companies had set their long term investment return
expectations to be, on average, 6.8%.
Funded ratios increase
The funded ratio of the Milliman 100 pension plans increased
during 2017 to 86.0% from 81.1% at the end of 2016 (85.9% for plans
with calendar year fiscal years in 2017, up from 81.4% for 2016).
The aggregate pension deficit decreased by $58.6 billion during
these calendar year companies’ 2017 fiscal years to $234.1 billion,
from an aggregate deficit of $292.7 billion at the end of 2016. For
fiscal year 2017, funded ratios ranged from a low of 62.4% for
American Airlines to a high of 155.0% for NextEra Energy, Inc.
FIGURE 10: FUNDED RATIO – ASSETS/PROJECTED
BENEFIT OBLIGATION
The 4.9% increase in the 2017 funded ratio reversed the 2016
decrease. The funded ratio had been 81.9% at the end of 2015.
Note that there has not been a funding surplus since the 105.8%
funded ratio in 2007.
Thirteen of the 87 Milliman 100 companies with calendar year
fiscal years reported surplus funded status at year-end 2017,
compared with eight companies in 2016, nine in 2015, eight in 2014,
19 in 2013, and six in 2012. These numbers pale in comparison with
the 49 companies with reported surplus funded status at year-end
2007. The combined impact of higher contributions and favorable
investment returns offset the increase in liabilities caused by lower
discount rates. As a result, 79 of the Milliman 100 companies with
calendar year fiscal years reported an increase in funded ratio for
2017, compared with 37 for 2016.
FIGURE 11: DISTRIBUTION BY FUNDED STATUS – 2012-2017
(CALENDAR YEAR FISCAL YEARS ONLY)
2017 pension expense decreases
There was a net decrease in 2017 pension expense: a $19.7
billion charge to earnings ($11.4 billion lower than in 2016).
This is well below the $56.3 billion peak level in 2012. Twentysix
companies recorded 2017 pension income (i.e., a credit to
earnings). Twenty-one companies also recorded income in 2016
and 16 companies in 2015, up from nine in 2012.
The discount rate for 2018 pension expense is based on the
year-end 2017 SEC disclosures. We estimate that 2018 pension
expense will decrease to $12.0 billion, a $7.7 billion decrease
compared with 2017, under the assumption of a continued
3.60% discount rate.
FIGURE 12: PENSION EXPENSE (INCOME) AND CONTRIBUTIONS
The aggregate 2017 cash contributions of the Milliman 100
companies were $61.8 billion, an increase of $19.2 billion from
the $42.6 billion contributed in 2016, and only $0.1 billion less
than the 2012 record high level of $61.9 billion. Contributions
had started to increase in 2016 to $42.6 billion from the amounts
contributed in 2015 and 2014 ($31.2 billion and $40.2 billion,
respectively). We speculate that this is due to increased
contributions by many plan sponsors to minimize their PBGC
premium increases, in addition to the tax benefits under tax
reform changes as discussed earlier.
Many plan sponsors may continue to contribute at these higher
levels for 2018 if they can’t find better uses for their corporate
cash. We expect that some plan sponsors undertaking PRT
activities (e.g., lump-sum payouts, annuity purchases, etc.) may
have to increase contributions to maintain funded status. Also,
some plan sponsors that want to minimize PBGC premium
costs may choose to accelerate plan funding to close pension
deficits sooner.
Pension deficit decreases slightly as a
percentage of market capitalization
The total market capitalization for the Milliman 100 companies
increased by 8.9%, which offset the increase in pension
obligations (which is due to lower discount rates). This resulted
in a decrease in the unfunded pension liability as a percentage
of market capitalization of 3.1% at the end of 2017, from 4.3% at
the end of 2016. Pension deficits represented less than 10.0% of market capitalization for 86 of the Milliman 100 companies
in 2017 and 74 of the Milliman 100 companies in 2016. This is
also an increase from 2013, when 81 companies had deficits that
were less than 10.0% of their market capitalizations.
Since 2011, we have had investment returns exceeding
expectations in five out of seven years, which has resulted in
elevated levels of market capitalization. In 2017, one company’s
plan deficit exceeded 50.0% of market capitalization, down
from two companies in 2015. This is down from nine in 2012 and
2011, the year we first started tracking this figure.
FIGURE 13: UNDERFUNDED PENSION LIABILITY AS A PERCENTAGE
OF MARKET CAPITALIZATION 2014-2017
Investment performance
exceeds expectations
The weighted average investment return on pension assets
for the Milliman 100 companies’ 2017 fiscal years was 12.7%,
which was above their average expected rates of return of 6.8%.
Ninety-eight of the Milliman 100 companies exceeded their
expected returns in 2017, including 12 of the 13 with off-calendar
fiscal years. Seventy-four companies exceeded their expected
returns in 2016. However, only three companies exceeded their
expected returns in 2015 and all three had off-calendar fiscal
years. But 81 companies in 2014 exceeded their expected returns
compared with 78 in 2013, 93 in 2012, 20 in 2011, and 98 in 2010.
The 2017 investment return was favorable, with plan sponsors
of the Milliman 100 companies now achieving investment
returns above expectations during seven out of the last nine
years. At December 31, 2017, total asset levels were $1.55 trillion.
This is $264 billion above the value of $1.286 trillion at the end
of 2007, prior to the collapse of the global financial markets.
During 2017, investment gains offset by the combination
of annuity purchases and lump-sum settlements increased
the market value of assets by $154.3 billion. The Milliman
100 companies’ actual investment return for 2017 was $174.6
billion compared with the expected return of $92.0 billion, a
difference of $82.6 billion. For the five-year period ending in 2017, investment performance had averaged 8.5% compounded
annually. There were three years of investment losses over
the past 18 years (2001, 2002, and 2008), contributing to an
annualized investment return of only 6.4% over that period.
FIGURE 14: INVESTMENT RETURN ON PLAN ASSETS
Expected rates of return
FIGURE 15: SPONSOR-REPORTED ASSUMED RATE OF RETURN
ON INVESTMENTS
Companies continued to lower their expected rates of return
on plan assets to an average of 6.8% for 2017, as compared
with 7.0% for 2016, 7.1% for 2015, 7.3% for 2014, 7.4% for 2013,
7.6% for 2012, 7.8% for 2011, and 8.0% for 2010. This represents
a significant drop from the average expected rate of return of
9.4% back in 2000.
None of the Milliman 100 companies utilized an expected rate
of return for 2017 of at least 9.0% (the highest was 8.96% for
2017). Only one company had utilized an expected rate of return
of at least 9.0% in 2016, 2015, 2014, and 2013, whereas three
companies also assumed an expected rate of return of at least
9.0% in 2012, 2011, and 2010, but this was down from five in 2009
and a high of 83 in 2000.
What to expect in 2018 and beyond
Our expectations in the coming year include:
- While the financial disclosures indicate that up to $34 billion
may be contributed in 2018, preliminary forecasts of
contributions are fickle.
- Pension expense is expected to decrease compared with the
2017 level by $7.7 billion. This is due to reductions in interest
cost as a result of the lower discount rate and the investment
gains experienced during 2017.
- As funding levels improve, we expect plan sponsors to
continue to shed equity risk and explore asset-liability
matching (ALM) and risk-hedging strategies.
- Further pension risk transfer activities are likely to occur
in the form of lump-sum windows for terminated vested
participants and pension lift-outs as rising PBGC premiums
remain a concern for plan sponsors.
Appendix
HISTORICAL VALUES (All dollar amounts in millions. Numbers may not add up correctly due to rounding.)
FIGURE 16: FUNDED STATUS
FIGURE 17: RETURN ON ASSETS
HISTORICAL VALUES (All dollar amounts in millions. Numbers may not add up correctly due to rounding.)
FIGURE 18: PENSION COST
FIGURE 19: ASSET ALLOCATIONS (BY PERCENTAGE)
FIGURE 20: OPEB FUNDED STATUS
Who are the Milliman 100 companies?
The Milliman 100 companies are the 100 U.S. public companies
with the largest defined benefit pension plan assets for which a
2017 annual report was released by March 12, 2018.
This 2018 report is Milliman’s 18th annual study. The total value
of the pension plan assets of the Milliman 100 companies was
more than $1.55 trillion at the end of 2017.
About the study
The results of the Milliman 2018 Pension Funding Study are
based on the pension plan accounting information disclosed
in the footnotes to the companies’ Form 10-K annual reports
for the 2018 fiscal year and for previous fiscal years. These
figures represent the GAAP accounting information that public
companies are required to report under Financial Accounting
Standards Board (FASB) Accounting Standards Codification
Subtopics 715-20, 715-30, and 715-60. In addition to providing the
financial information on the funded status of their U.S. qualified
pension plans, the footnotes may also include figures for the
companies’ nonqualified and foreign plans, both of which are
often unfunded or subject to different funding standards from
those for U.S. qualified pension plans. The information, data, and
footnotes do not represent the funded status of the companies’
U.S. qualified pension plans under ERISA.
Thirteen of the companies in the 2018 Milliman Pension Funding
Study had fiscal years other than the calendar year. The 2018 study
includes three new companies to reflect mergers, acquisitions, and
other corporate transactions during 2017. Figures quoted from 2017
reflect the 2018 composition of Milliman 100 companies and may
not necessarily match results published in the 2017 Milliman PFS.
Generally, the group of Milliman 100 companies selected remains
consistent from year to year. Privately held companies, mutual
insurance companies, and U.S. subsidiaries of foreign parents were
excluded from the study.
The results of the 2018 study will be used to update the Milliman
100 PFI as of December 31, 2017, the basis of which will be used
for projections in 2018 and beyond. The Milliman 100 PFI is
published on a monthly basis and reflects the effect of market
returns and interest rate changes on pension funded status.
About the authors
Zorast Wadia, FSA, CFA, EA, MAAA, is a principal and
consulting actuary in the New York office of Milliman. He has
more than 18 years of experience in advising plan sponsors on
their retirement programs. Zorast has expertise in the valuation
of qualified and nonqualified plans. He also has expertise in the
areas of pension plan compliance, design, and risk management.
Alan H. Perry, FSA, CFA, MAAA, is a principal and consulting
actuary in the Philadelphia office of Milliman. He has more
than 27 years of experience in advising plan sponsors on asset
allocation and financial risk management. Alan specializes
in the development of investment policies by performing
asset-liability studies that focus on asset mix, liability-driven
investing, and risk hedging.
Charles J. Clark, ASA, EA, MAAA, is a principal and director of
the employee benefits research group in the Washington, D.C.,
and New York offices of Milliman. He has over 37 years
of experience as a consulting actuary. Charles provides
analysis of employee benefit legislation, regulations, and
accounting standards to Milliman consultants. He has worked
extensively with plan sponsors, Washington, D.C., employee
benefits trade groups, and lawmakers on employee benefit
program strategy, design, pricing, and interpretation.
Acknowledgments
The authors thank the following Milliman colleagues for their
assistance in compiling the figures and editing the report for the
Milliman 2018 Pension Funding Study: Keila Cohen, Mary Der,
Karen Drake, Rebecca Driskill, Jeremy Engdahl-Johnson,
Jennifer Faber, Kevin Ferris, Chris Goodman, Heng Lim,
Elizabeth Mattoon, Janie Pascual, Jamie Phillips, Lesley Pink,
Rebecca Ross, Javier Sanabría, Becky Sielman, Mike Wilson,
Susan Yearick, Holly Youzwak, Lynn Yu, and Delbert Zamora.