Milliman News
Milliman Study Confirms 2007 Corporate Defined Benefit Pension Gains Were Wiped Out in First Quarter of 2008
NEW YORK, April 16 PRNewswire — The top 100 corporate defined benefit pension plans last year gained some seven percentage points in funded status to bring them to 106 per cent funding by December 31, 2007, according to Milliman's 2008 Pension Funding Study.
However, falling interest rates and lackluster investment performance in the first quarter of 2008 erased that gain, leaving the plans slightly under-funded today.
"Last year's gains were largely the result of an increase in interest rates which reduced the plans' liabilities," said John Ehrhardt, a Milliman principal and consulting actuary. "The fact that rates have fallen this year and the current prospect for investments give us some cause for concern. While these plans are nearly fully funded, a scenario is possible that might lead to further losses in funded status during 2008."
Milliman now tracks current year changes in funded status through its new Milliman 100 Monthly Pension Funding Index, which reflects the impact of market returns and interest rate fluctuations of the pension funded status of the 100 corporations in the annual study, based on actual reported asset values, liabilities and asset allocation.
The total assets of the 100 plans in the Milliman study total some $1.3 trillion.
For the first time this century, the liabilities of the pension funds surveyed last year decreased from $1.249 billion to $1.243 billion because interest rates increased from 5.75 to 6.20 per cent. Investment returns of 9.9 percent exceeded anticipated returns of 8.3 percent. This resulted in the funded status for the plans reaching 106 percent by the end of 2007.
However, January 2008 saw a worst-case scenario for pension plans-falling interest rates and asset losses. This, coupled with similar problems in subsequent months, saw the gains of the entire previous year wiped out in one quarter.
Pension Expense Decreases; Firms with "Pension Income" Double
Pension expense for the 100 companies in the study declined in 2007 to $19.3 billion from $27.3 billion in 2006. There were 16 companies that reported "pension income" or negative expense, up from 8 in 2006. Milliman expects pension expense will continue to fall this year.
Last year was the fifth straight year of asset gains since 2002. Significantly, the equity share of those assets fell in 2007 from 59.5 per cent to 55 per cent, a shift of almost $60 billion into fixed income and other investments. This indicates more companies have adopted Liability Driven Investment Strategies that seek to link plan assets with instruments that have similar duration to the plan liabilities. Milliman also expects this trend will continue.
Milliman's Pension Funding Study is based on pension plan accounting information disclosed in the annual report footnotes of the 100 largest corporate pension plans by assets for the 2007 fiscal year and previous years. These numbers represent the GAAP accounting information public companies are required to report under Statements of Financial Accounting Standards 87, 88, 106 and 132. They do not reflect the funded status of the companies' U.S. qualified pension plans under ERISA.
Milliman, whose corporate offices are in Seattle, serves the full spectrum of business, financial, government, and union organizations. Founded in 1947 as Milliman & Robertson, the company has 48 offices in principal cities in the United States and worldwide. Milliman employs more than 2,000 people, including a professional staff of more than 900 qualified consultants and actuaries. The firm has consulting practices in employee benefits, healthcare, life insurance/financial services, and property and casualty insurance. It is a founding member of Abelica Global, an international organization of consulting firms serving employee benefits clients around the globe. For further information, visit www.milliman.com.
SOURCE Milliman
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