Pension Funding Index June 2020
In May, the funded status of the 100 largest corporate defined benefit pension plans worsened by $17 billion as measured by the Milliman 100 Pension Funding Index.
Milliman’s December 2020 Multiemployer Pension Funding Study reports on the estimated funded status of all U.S. multiemployer defined benefit (DB) plans as of December 31, 2020.
Figure 1 shows that the overall funding shortfall for all plans declined by about $16 billion to a total shortfall of approximately $91 billion during 2020. The aggregate funded percentage improved from 85% to 88%. Our hypothetical asset portfolio earned approximately 12% for 2020.1
|Accrued benefit liability||$712||$732||$20|
|Market value of assets||(605)||(641)||(36)|
Based on plans with complete IRS Form 5500 filings. Includes 1,249 plans as of December 31, 2019, and 1,220 plans as of December 31, 2020.
Figure 2 provides a historical perspective on the aggregate market value funded percentage of all multiemployer plans since the end of 2007
The aggregate funded percentage for multiemployer DB plans is 88%, which now exceeds the pre-2008 market crash level of 85%. The pandemic shocked the markets in the first quarter of 2020 and asset values plummeted, resulting in a drop in the aggregate funded percentage from 85% to 72%, the largest single quarterly drop in funded percentage since 2007 and its lowest point in nearly eight years. The aggregate funded percentage rebounded to 82% in the second quarter of 2020, the largest single quarterly increase in funded percentage since 2007. Continued market recovery and higher asset values allowed the aggregate funded percentage to improve to 88% by year-end.
The aggregate funded percentages during 2020 reflect the impact of COVID-19 on investment returns only. The underlying data for this study is largely based on the 2018 and 2019 plan year Form 5500 information, and therefore does not yet reflect the impact of the pandemic on plan participation and contribution levels. Some industries (such as entertainment and travel) have been decimated by shutdowns, while other industries (such as construction and food retail) have continued with less disruption. The full impact of the pandemic on multiemployer plans will emerge in future studies as more information becomes available.
Figure 3 shows the distribution of funded percentages for all plans in the study as of December 31, 2020.
Nearly half of all plans (580) are at or above 100% funded, and another 30% of plans (376) are 80% to 100% funded. Stated another way, almost 80% of all plans are 80% funded or better. Under the Pension Protection Act (PPA), plans that are at least 80% funded generally fall in the green zone. These plans still face a lot of uncertainty, however, and trustees must remain vigilant to manage plan risks, such as those related to economic volatility and growing plan maturity, in order to remain in the green zone.
Ten percent of plans (128) are below 60% funded and may be headed toward insolvency. Many have exhausted all reasonable measures to adjust contributions and benefit levels to the maximum extent possible. Because asset values are low, these plans will need sustained (likely double-digit) investment returns each year to remain solvent and/or recover.
Figure 4 shows the historical funded percentage of all multiemployer plans since the end of 2007 by the zone status reported on the latest Form 5500 used for the study. For example, the green line shows the historical funded percentages of plans reported in the green zone without regard to their previous zone statuses. The blue dotted line represents all plans combined.
Critical and declining (C&D) plans continue on a diverging path from all other plans. The aggregate funded percentage of C&D plans is now less than half of what it was back in 2007. In contrast, the majority of non-C&D plans in aggregate have largely recovered from the 2008 global financial crisis. However, prospects for continued improvement for non-C&D plans remain tenuous due to continued market volatility, economic uncertainty related to the COVID-19 pandemic, and increasing plan maturity levels. Financially distressed plans feel the pressure even more, since excess investment returns have a smaller impact as asset values drop.
Figure 5 illustrates the impact one year’s investment return can have on the projected funded status. Plans in C&D status now are shown in red, and those that are not are shown in blue. The solid lines represent the impact on the projected funded percentage if actual returns for 2021 differ from each plan’s actuarial assumption by plus or minus 10%, followed by the assumed return for each year thereafter.
In the aggregate, non-C&D plans can withstand a year in which investments underperform by 10%, as they are still expected to continue on an upward trend. In contrast, C&D plans would need sustained market outperformance in consecutive years in order to reverse their paths toward insolvency.
Beyond asset returns, multiemployer pension plans could be significantly impacted by the following:
In December 2020, Senate Republicans introduced the Chris Allen Multiemployer Pension Recapitalization and Reform Act (CAMPRRA). One of the key changes proposed is to cap the discount rate used by plans to value their past service liabilities at 6.5%, which is phased in over 15 years. We note that of the 1,220 plans included in this study, only about 210 plans (less than 20% of all plans) have a discount rate of 6.5% or less.
Figure 6 shows a history of the average discount rate assumption2 for all plans in our study. Since the study’s inception, the average discount rate has dropped around 30-50 basis points to about 7.0%. However, due to the lag in reporting (the most recent information is as of the beginning of the 2018 or 2019 plan year for most plans), discount rates may be even lower today. Recent market outperformance, particularly in 2019 and 2020, has allowed many plans to collect on future earnings earlier than expected, suggesting lower return expectations going forward. The proposed change in CAMPRRA could further accelerate the downward trend in discount rates.
Trustees and plan professionals should continue to monitor these developments and understand the impact of any potential changes on their plans.
The results in this study were derived from publicly available IRS Form 5500 data filed through December 2020 for all multiemployer plans, numbering between 1,200 and 1,300. Data for a limited number of plans that clearly appeared to be erroneous was modified to ensure the results were reasonable and a sufficiently complete representation of the multiemployer universe.
Liability amounts were based on unit credit accrued liabilities reported on Schedule MB and were adjusted to the relevant measurement dates using standard actuarial approximation techniques. For this purpose, each plan’s monthly cash flow, benefit cost, and actuarial assumptions were assumed to be constant throughout the year and in the future. Projections of asset values to the measurement date reflect the use of constant cash flows and monthly index returns for an asset portfolio composed of 23.4% U.S. stocks, 8.9% international stocks, 8.8% global equity, 31.2% U.S. fixed income, 1.1% global or international fixed income, 0.8% cash, 7.2% private equity, 9.1% real estate equity, and 9.5% alternative investments. This asset portfolio is the average asset mix as of September 30, 2019, for the top 1,000 union defined benefit plans, as reported in the February 10, 2020, issue of Pension & Investments.
Significant changes to the data and assumptions could lead to materially different results for individual plans but would likely not have a significant impact on the aggregate results or the conclusions in this study.
1Individual plans’ returns may have been higher or lower based on their asset allocations, asset classes, and management styles. For more information about the asset portfolio used for this study, see the section “About This Study” below..
2The straight average discount rate, which weights each plan equally and diminishes the impact any one plan has on the overall average, as well as the average discount rate weighted by liabilities are shown.