Low Rates Hurt Corporate Pension Funding Ratio: Employer Plan Watch

Milliman says public plan funded levels have improved, and pension buyout annuities are cheaper.

By Allison Bell
This article was originally published by ThinkAdvisor

Milliman Inc. says falling interest rates have hurt funding levels at large U.S. corporate pension plans, but that even modest increases rates could push funding levels way over 100%.

The ratio of assets to liabilities at 100 large corporate plans fell to 88.2% at the end of 2020, down from 89.8% a year, the Seattle-based firm reports.

Assets increased to $1.7 trillion, from $1.6 trillion, but projected benefit obligations increased to about $2 trillion, from $1.8 trillion, according to Milliman calculations.

The discount rates used in benefit obligation forecasts, which are related to interest rates, fell to 2.46% at the end of 2020, from 3.2% a year earlier.

If rates increased to 3.06% by the end of this year, and to 3.66% by the end of 2022, then the funded ratio for the large corporate plans would increase to 104% by the end of 2021, and to 123% by the end of 2022, according to Milliman.

But Milliman found that the average pension funding level at 100 large public defined benefit pension plans increased to 78.6% at the end of 2020, up from 74.9% at the end of 2019, and up from a low of 66% in March 2020, when investors were seeing COVID-19-related lockdowns.

Funding levels improved partly because investment returns have been strong since the first quarter.

Meanwhile, the cost of the group annuities purchased to fund pension plan obligation buyouts, or shifts of pension benefits responsibility to life insurers, fell to 99.4% of the estimated liability total in November 2020, from 104.3% at the beginning of the year, in part because of strong insurer interest in the pension risk transfer market, according to another series of Milliman reports.

In other pension, retirement plan and group annuity news:

Ameritas, Lincoln, Nebraska, has introduced a 403(b) defined contribution retirement plan program for nonprofit employers, to complement its 401(k) plan program.

The company also has added an Ameritas GPS retirement plan investment platform, with support from Matrix Trust Company.

The program gives participants the ability to choose their own services and investments, and it also offers a number of planning options, such as several fixed-income investment options, according to Ameritas.

Annexus Retirement Solutions, Scottsdale, Arizona, has introduced the Lifetime Income Builder program.

Annexus is known as an annuity contract designer.

The new program, which will be available for purchase in the middle of this year, will let an employer embed a guaranteed lifetime withdrawal benefit into a target data fund or a managed account inside a defined contribution retirement plan, according to Annexus.

Plan participants will be able to take cash out and move the living benefit feature from the employer’s plan to another retirement savings arrangement, through a portability feature, the firm says.

Further, it expects to announce the names of insurers and asset managers implementing the program throughout the year.

Annexus says its data integration and distribution technology should streamline the process of offering the Lifetime Income Builder option.

Metropolitan Tower Life Insurance Company, an arm of MetLife Inc., has taken responsibility for $765 million in pension obligations for 5,200 retirees and defined benefit pension plan participants at Weyerhaeuser Company by selling the company a group annuity, for pension risk transfer purposes.

MetLife said its managing about $3 billion in pension benefits payments per year for about 720,000 annuitants.

MetLife’s flow of pension benefits payments is equal to only about 0.3% of the amount Social Security is spending on benefits each year, but it’s comparable to the 2019 gross domestic product of Aruba, according to International Monetary Fund GDP data for Aruba.

Massachusetts Mutual Life Insurance Company, Springfield, Mass. has sold a $280 million group annuity to Unisys Corp., Blue Bell, Pennsylvania.

The MassMutual annuity helped the computer company implement a pension risk transfer for some of the participants in its U.S. pension plans.