Case study: Monthly reports help DB plan sponsor cope with market turmoil

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By Kevin Ferris | 11 August 2011

The challenge

The combination of the funding rule changes required under the Pension Protection Act of 2006 (PPA) and the turmoil in the investment markets during 2008, posed many challenges for sponsors of defined benefit plans.

A not-for-profit Milliman client, a defined benefit plan sponsor, has several internal departments involved with the plan, including finance, human resources, and investments. The head of each department also reports to various boards.

Prior to the recent market downturn, the defined benefit plan was overfunded and did not require contributions for many years. In addition, the client felt the annual pension expense had been at a manageable level.

All changed when the investment markets collapsed in 2008.

Once the financial market turmoil started, the various department heads of the client needed pension plan estimates and projections in order to prepare for budgets and various internal reports. Each department was requesting several different projections and estimates. In addition, the estimates were soon outdated due to rapid changes in asset values and discount rates. Frequent updates and revisions were constantly required in order to ensure that the estimates and projections reflected current market conditions.

We soon realized that providing these ad hoc projections was not cost effective, and we needed to find a more efficient way to provide the client with timely updates that reflected the rapidly changing economic environment.

The solution

Input from the department heads led us to develop a monthly summary report with data strategically grouped so that the relevant information for each department was provided in their preferred format. The report was color coded and flagged any item that might need attention (e.g., funding ratios change color if they fall below certain thresholds, estimates and actual figures are shown with different colors, etc.).

Our summary report provided the information that each department needed on a monthly basis; it was easy to follow, and it showed the trends in investments, expense, and various liabilities as discount rates and asset values changed during the year. The model that we developed for the client was more effective and less expensive to prepare than providing various ad hoc estimates and projections during the year.

The monthly update, typically provided very soon after the close of each month, was usually followed by a conference call to discuss the results and review any questions that may have arisen.

The outcome

The monthly update has become a valuable tool for the client. It provides several departments with timely updates and projections that help each department in its budgeting and planning processes. It shows how the pension plan liabilities and funded ratios are trending as discount rates and market values change. It also shows an updated estimate of how these changes impact future contribution requirements and pension expense estimates.

This update provides the client with the information it needs for several internal reports. In addition, as developing trends become apparent, corrective strategies, as applicable, can be discussed and evaluated in advance. Last but not least, this has saved the client both time and capital.

We have also implemented similar updates for several other clients. Since each client has unique needs, our approach has been to develop a unique summary that reflects input from each client. The end result is that the client has timely information that shows how the discount rate and market value trends are affecting its pension plan. This has helped each client to be more proactive in the area of planning and budgeting.

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The following is a page from a sample report that shows the monthly funding and accounting projections.


click to enlarge

The following is a page from a sample report that shows the operation constraint outlook and projected funded status.