Interest rates spur growth in corporate pension liability

The nation’s largest corporate defined benefit pension plans continue to experience woes as their collective funding statuses dwindle due to unsavory interest rates.

In its October Pension Funding Index report, Milliman, a consulting and actuarial firm, stated that the $14 billion increase in total assets were offset last month when liabilities increased to $22 billion for 100 of the country’s largest DB plans sponsored by U.S. public companies. This group saw its funding status decrease by 0.3% over the past month to 84.8%.

At the end of 2013, the funding status for this corporate pool of plan sponsors was situated at 95.2%. John Ehrhardt, principal and consulting actuary at Milliman, said at the time that it was “the first win-win for pensions since 2007.” Over the year, there was a $318 billion in funded status improvement.

Meanwhile, as of Oct. 31, $1.7 trillion in pension benefit obligations still remain for these companies. Zorast Wadia, a principal and consulting actuary in Milliman’s New York office, explains that interest rates are to blame for this drastic drop in corporate pension funding.

“Interest rates for the year have fallen close to 70 basis points,” Wadia says. One bright spot is that “assets have been gaining [but] not nearly as much as the liabilities,” he says.

According to Wadia, pension de-risking strategies can help plan sponsors because they are “reducing the size of the plan and you are taking risk off the table.” For instance, Motorola Solutions, a member of the Milliman 100-plan cohort, said in September it was incorporating a new group annuity and lump sum payment plan that was expected to shave $4.2 billion in growing liabilities and benefit payments off its balance sheet.

But benefits are usually seen over the long term. These DB funds do not report an immediate improvement in funding status, Wadia explains. Usually, corporate plan sponsors use de-risking strategies to reduce the size of their retirement plan obligations because it may be “dominating [their] balance sheets,” but they also result in large asset reductions to total plan size. 

“Initially it hurts funded status and a lot things are done to get it in line,” Wadia explains, noting that many companies may make an additional contribution to their pension plans in order to prop up their funded status and total assets to where they were before the de-risking transaction.

Source: Employee Benefit News