The 2019 edition of the Milliman Corporate Pension Funding
Study (PFS) is our 19th annual analysis of the financial
disclosures of the 100 largest corporate defined benefit (DB)
pension plan sponsors. These 100 companies are ranked highest
to lowest by the value of their pension assets reported to the
public, to shareholders, and to the U.S. federal agencies that
have an interest in such disclosures.
We’re pleased to report that, despite investment losses of
2.8%—the worst asset performance since 2008—the private
single-employer defined benefit plans of the Milliman 100
companies continued to make funding improvements in 2018.
The funded ratio for the Milliman 100 companies settled at 87.1%,
an improvement from the year-end 2017 funded ratio of 85.8%.
The funding deficit improved by $41 billion, ending the year at
$215 billion. Sixteen plans had a funded ratio of at least 100%
compared to 15 plans from the 2018 Milliman PFS.
FIGURE 1: DISTRIBUTION BY FUNDED RATIO
Corporate plan sponsors continued last year’s trend of higher
contributions, totaling $57.5 billion. Thirteen of these employers
contributed at least $1 billion and three of these contributions were
among the top 10 largest contributions in the history of this study.
Lockheed Martin Corporation made a $5.0 billion contribution
(8th largest in the history of the study), General Electric made
a $6.8 billion contribution (4th largest), and AT&T made a $9.3
billion contribution (2nd largest, only topped by a General Motors
contribution of $19.1 billion in 2003). Employer contributions have
totaled nearly $120 billion over the last two years; this amount
exceeds any two-year period in the history of our study.
The disappointing 2018 investment performance of global
equity markets, coupled with rising interest rates in 2018,
resulted in the first year of investment losses since 2008, with
an average loss of 2.8%. These investment losses reduced
plan assets by $43 billion compared to the expectation that
investment gains would add at least $97 billion, based on the
companies’ long-term investment return assumptions.
In addition to large contributions, the funded status
improvements in 2018 were driven by the discount rates plan
sponsors used to value pension liabilities. The average discount
rate increased by 52 basis points to 4.01% from 3.49%. This is
the second largest one-year increase for the PFS. The pension
benefit obligation (PBO) of the Milliman 100 plans declined to
$1.66 trillion, down from last year’s all time high of $1.80 trillion.
Pension expense (the charge to the income statement under
Accounting Standards Codification Subtopic 715) declined to
$16.2 billion in fiscal year (FY) 2018 from $20.3 billion in FY2017.
Although this continues the trend of the past several years,
following the all-time high of $56.5 billion in FY2012, it is likely to
be reversed in FY2019.
We noted a modest decline in the life expectancy assumptions;
participants and pensioners will not live as long as previously
assumed based on use of the latest mortality tables published
by the Society of Actuaries. The change in life expectancy
assumptions reduced the actuarial present value of the PBO.
During FY2018, pension settlements or pension risk transfer
(PRT) programs continued to be seen as prudent financial
cost management by plan sponsors. Among the Milliman 100
pension plans, settlement payouts totaled $18.8 billion in
FY2018 compared to $12.7 billion in FY2017.
PRT settlements result in a measurable reduction in future
premiums to be collected by the Pension Benefit Guaranty
Corporation (PBGC). Like the Milliman 100 pension plans,
the PBGC reported a large funded status improvement for the
corporate pension plans under its custody in the federal fiscal
year ending September 30, 2018.
The PBGC recorded a 102% funded ratio for the plans that
terminated (when the sponsoring employer filed for Chapter 11
insolvency) and were sent to it as the receiving custodian. (We
note that plans the PBGC expects to terminate are also included.)
This is up from the 91% funded status reported at September
30, 2017. This change was driven by a large decrease in liabilities
caused by the measurable increase in the generally conservative
interest rates the PBGC sets. Despite an increase in the PBGC
flat dollar premium rates, the PBGC’s total premium income
decreased by 18% in FY2018 due to the improved funded status of
corporate pension plans ($5 billion, down from $6.7 billion).
We speculated in last year’s study that, as a result of the Tax
Reform Act of 2017, the reduction of the corporate marginal tax
rates to 21% in 2018 from 35% in 2017 could cause plan sponsors
to implement certain strategies concerning the recognition
of contributions in a specific tax year so as to maximize
deductibility of plan sponsor contributions. If they did so, it
was not widely disclosed, as only three companies reported in
Form 10-K disclosures that they made increased contributions
due to the new tax law.
Five companies exited the Milliman study due to mergers,
reductions in the market values of pension plan assets, or a delay
in releasing their financial statement. Aetna was acquired by CVS.
Edison International, Hartford Financial Services Group, Inc., and
Kimberly-Clark each had a market value of assets that was too low
to be included in the 2019 PFS. Lastly, Kraft Heinz did not release
their 10-K disclosures in time to be included in the 2019 PFS.
Five companies are new to the Milliman 100: CVS, DXC
Technology (a spin-off/merger involving Hewlett Packard
Enterprise and Computer Sciences Corporation), Sysco, Parker-
Hannifin, and United Continental Holdings.
Nineteen of the Milliman 100 companies indicated they have
adopted or plan to adopt “spot rate” approaches for calculating
pension expense during FY2018. Last year’s study noted that
43 companies had included such disclosures for 2017 fiscal year
expense. Once companies adopt use of a spot rate approach for
computing pension expense, it is unlikely that auditors would
allow a switch back to the traditional method for computation
of pension expense barring exceptional circumstances. It is also
unlikely that companies already using a spot rate approach will
continue to highlight it in their 10-K disclosures, which explains
the comparative decrease noted in this year’s PFS.
Pension risk transfer activity from the plan sponsors to insurance
companies continued in 2018. FY2018 pension risk settlement
payments to former—but not yet retired— participants
continued as well. We have estimated that the sum of the pension
risk transfers to insurance companies (sometimes referred
to as “pension lift-outs”) and the corresponding settlement
payments totaled about $18.8 billion, compared with $12.7 billion
in FY2017. Examples among Milliman 100 companies include
FedEx ($6.2 billion), Lockheed Martin Corporation ($1.8 billion),
Entergy Corporation ($1.8 billion), and International Paper ($1.7
billion). These pension risk transfer strategies also relieve the
plan sponsor of the PBGC premium payments that are required
for the former employees, who are part of the participant head
count. With any pension risk transfer strategy, employers must
weigh the benefits of risk reduction against opportunity costs
of lost pension assets and the prospects of paying premiums or
additional costs beyond ordinary funding requirements in order
to accomplish the third-party risk transfer.
The Internal Revenue Service (IRS) released IRS Notice 2019-
18 in March 2019 indicating that it will no longer thwart the
ability of a plan sponsor to offer a lump-sum settlement to
retirees or their surviving beneficiaries. This action reversed
the guidance issued in 2015 in which the IRS prohibited such
lump-sum settlements to in-pay participants. The message to
plan sponsors from the earlier guidance was, in effect, that the
settlements were unlawful. We will cautiously speculate that
PRTs will accelerate in FY2019 due to this reversal.
FIGURE 2: HIGHLIGHTS (FIGURES IN $ BILLIONS)
In addition to defined benefit pension plans, the PFS tracks
the actuarial obligations of postretirement healthcare benefits.
FY2016 marked the first year that the aggregate reporting of
these accumulated postretirement benefit obligations (APBOs)
was under $200 billion (at about $196.0 billion). This trend
continued in FY2018, with the APBOs decreasing an additional
$24.6 billion from their FY2017 level to $168.4 billion. This is
consistent with the trend by plan sponsors over the last decade
of divesting other postemployment benefits (OPEB) liabilities.
As we write this report in April 2019, we acknowledge that
the year-end 2018 results do not reflect the favorable financial
market investment gains in the first quarter of 2019. Equity
market gains were in a range of 10% to 14%. Bond yields also
declined, increasing the value of the fixed income portion of
the pension assets.
The investment loss on the pension trusts was 2.8%, when the
expectation was a FY2018 investment gain of 6.6%. Reflecting
the actual FY2018 loss along with the expected FY2018 gain,
we estimate that there was a net investment loss of $141 billion.
This is the first year since 2008 that there has been a negative
investment return. Since 2008, pension plan asset allocations
to equities decreased to about 31.0%, from about 43.9%, while
fixed income allocation has increased to about 49.4% from
While the $57.5 billion contributed for 2018 was high, it was
still a decrease when compared with about $62 billion in 2017
contributions. Pension expense in FY2018 declined by
$4.1 billion to $16.2 billion, from $20.3 billion in FY2017. One
may reasonably conclude that pension expense will increase
in FY2019 because of the poor FY2018 asset performance.
Detailed comments and illustrations follow in the remainder
of the 2019 PFS. Various tables with historical values can be
found in the Appendix, including a newly added table in this
year’s study which provides pension plan figures classified by
business sector for the Milliman 100 companies.
Pension investing in 2018 was
both the best of times and the
worst of times
The first nine months of 2018 saw rising U.S. equity markets
and rising discount rates. Plan assets climbed while liabilities
fell. But the 4th quarter of 2018 brought plummeting equity
markets and a halt to rising discount rates. We estimate that the
funded ratio of the Milliman 100 plans climbed above 91.0% on
September 30 before falling to 87.1% by December 31.
With the average discount rate rising by 58 basis points during
2018 for the calendar fiscal year plans, we estimate that their
pension liabilities decreased approximately 5% on an economic
basis (due to the passage of time and changes to discount
rates, ignoring benefit payments and accruals). Plans with
significant allocations to fixed income as part of a liability-driven
investment (LDI) strategy typically have allocations to
long-duration high-quality bonds. During 2018 these bonds lost
approximately 5% due to rising yields—closely tracking the
decrease in pension liabilities. Interestingly, U.S. equities lost a
similar amount, while non-U.S. equities lost significantly more.
Cash and short duration fixed income were among the only
asset classes to avoid losses during 2018.
Rates of return earned in 2018 for the 84 companies sponsoring
pension plans with calendar fiscal years ranged from -10.2%
to 2.4%, with an average of -3.9%. Only two plans earned a
positive return. Returns mostly fell in the -6.5% to -1.5% range
(70 plans), with eight plans earning returns below -6.5% and six
plans earning returns above -1.5%. Generally, plans with greater
allocations to equities earned lower returns. The 24 plans with
equity allocations of at least 50% earned an average return
of -5.5% while the 20 plans with equity allocations below 25%
earned an average return of -2.3%.
FIGURE 3: ESTIMATED RATES OF RETURN EARNED IN 2018
FOR PLANS BY THEIR ALLOCATION TO EQUITIES
(CALENDAR YEAR FISCAL YEARS ONLY)
FIGURE 4: ESTIMATED RATES OF RETURN EARNED IN 2018 FOR
PLANS BY THEIR ALLOCATION TO FIXED INCOME
(CALENDAR YEAR FISCAL YEARS ONLY)
Equity allocations in the pension portfolios fell to an average
of 31.0% by the end of 2018. The companies comprising the
Milliman PFS have generally shifted toward higher allocations
of fixed income investments. This trend has surfaced as plan
sponsors shifted allocations to de-risk their pension plans over
the past decade.
The actual asset return for the plan sponsor with the highest
allocation to equities (74.5%) was -6.9%, which was worse
than the return of -1.4% for the plan sponsor with the lowest
allocation to equities (5.3%) in 2018. The highest asset return
among all companies with calendar fiscal years was 2.4%, while
the lowest was -10.2%.
In prior years, investment allocations made by plan sponsors
had showed a trend toward implementing LDI strategies.
Generally, this involves shifting more assets into fixed income
positions. This trend appears to have continued in 2018. The
percentage of pension fund assets allocated to equities, fixed
income, and other investments was 31.0%, 49.4%, and 19.6%,
respectively, at the end of FY2018, compared with 36.1%, 45.0%,
and 18.9%, respectively, at the end of FY2017.
Unlike in FY2017, when plans with high allocations to fixed
income (over 50%) underperformed the other plans (10.6%
average return compared with 14.6%), in FY2018 the plans with
high allocations to fixed income outperformed the other plans
(-2.6% compared with -4.4%).
Over the last five years, the plans with consistently high
allocations to fixed income have slightly outperformed the
other plans while also experiencing lower funded ratio
volatility. Among the 84 companies in the Milliman PFS with
calendar fiscal years, 23 pension plans had fixed income
allocations greater than 40.0% at the end of FY2013 and
maintained an allocation of at least 40.0% through FY2018. Over
this five-year period, these 23 plans experienced lower funded
ratio volatility than the other 61 plans (an average funded
ratio volatility of 3.5% versus 5.3% for the other 61 plans) while
earning a slightly higher five-year annualized rate of return (an
average of 6.1% versus 5.2%). Plans with at least 50% in fixed
income have outperformed other plans over each of the last five
years with the exception of 2017.
FIGURE 5: FIXED INCOME ALLOCATION 50% OR HIGHER (CALENDAR
YEAR FISCAL YEARS ONLY)
Overall, allocations to equities decreased during FY2018,
resulting in an average allocation of 31.0%—the lowest equity
allocation in the 19-year history of the Milliman PFS. None of
the 100 companies had increases to their equity allocations of more than 10.0% in 2018. Seventeen companies decreased their
equity allocations by more than 10.0% in 2018, compared with
one company in 2017, three in 2016, four in 2015, 12 in 2014, five
in 2013, four in 2012, and 10 in 2011.
Overall allocations to fixed income increased in FY2018,
resulting in an average allocation of 49.4%. Only one company
had a decrease of more than 10.0% in its fixed income
allocation. Eighteen companies, however, increased their fixed
income allocations by more than 10.0% in 2018, compared with
three in 2017, four in 2016, three in 2015, seven in 2014, four in
2013, two in 2012, and six in 2011.
FIGURE 6: ASSET ALLOCATION OVER TIME
Other asset classes include real estate, private equity, hedge funds,
commodities, and cash equivalents. More specific details on how
investments are allocated to the other categories are generally
not available in the U.S. Securities and Exchange Commission
(SEC) filings of the companies. Overall, allocations to other asset
classes remained stable in FY2018. Six companies increased their
allocations by 5.0% or more to other asset classes during 2018.
For comparison purposes, we have looked at historical changes
since FY2005, the first year when the Milliman 100 companies
consistently made allocation information available. The allocation
to equities was down from 61.7% and the allocation to fixed
income instruments was up from 28.6% at the end of FY2005. The
percentage of investments in other asset classes was also up from
the 9.7% allocation at the end of FY2005.
PRT activities continue
Similar to the past few years, plan sponsors continued to
execute pension risk transfer (PRT) activities in FY2018 as
a way of divesting pension obligations from their defined
benefit (DB) plans and corporate balance sheets. Large-scale
pension buyout programs were transacted for four of the
Milliman 100 companies, as pension assets and liabilities
were transferred to insurance companies. International Paper,
Entergy Corporation, Lockheed Martin Corporation, and
FedEx reported transactions of $1.7 billion, $1.8 billion,
$1.8 billion, and $6.2 billion, respectively.
The 2018 PRT market was considerably more active when
compared with the 2017 market. Extracting the dollar volume
of PRT activities from Form 10-K disclosures is an estimate and
it appears that the reported dollar volume in FY2018 was $18.8
billion, an increase of $6.0 billion compared with the FY 2017
reported dollar volume of $12.7 billion.
PRTs are deemed by plan sponsors to be an effective way to reduce
a pension plan’s balance sheet footprint, but generally they have an
adverse effect on the plan’s funded status, as assets paid to transfer
accrued pension liabilities are higher than the corresponding
actuarial liabilities that are extinguished from plans. Much of this
incongruity stems from Internal Revenue Service (IRS) pension
plan valuation rules differing from an insurance company’s
underwriting assessment of these same liabilities.
In the past few years, we’ve reported that a more prevalent
de-risking measure came in the form of a “lump-sum window”
program, in which some plan sponsors settled the pension
obligation by distributing payments to specific groups of former
participants. In March, the IRS issued Notice 2019-18, in which
restrictions imposed on lump-sum settlements to retirees and
their beneficiaries were lifted (IRS in effect nullified Notice 2015-
49). We anticipate that plan sponsors may avail themselves of
this strategy as they move ahead with pension de-risking.
The Office of PBGC Participant and Plan Sponsor Advocate
issued a report in 2018 and stated that the PBGC premiums are
a core reason for plan sponsors to divest DB plans. PBGC flat
dollar premiums increased to $80 in 2019 from $74 in 2018. The
PBGC “variable rate premium” increases to 4.3% of the pension
plan’s PBGC-funded status deficit in 2019, from 3.8% of the 2018
deficit. (The PBGC’s funded status deficit uses interest rates
and mortality assumptions that are different from those used to
determine the funded status of the Milliman 100 companies.)
The FY2018 funded ratio of 87.1% was lower than we reported
in the January 2019 Milliman 100 Pension Funding Index (PFI).
The January 2019 PFI funded ratio of 89.7% was based on data
collected for the 2018 Milliman Pension Funding Study. This
revised funded ratio of 87.1% from our current study reflects
the collection and collation of publicly available information.
Rising discount rates in FY2018 helped
to boost funded status in an otherwise
disappointing year for asset returns
Discount rates used to measure plan obligations, determined
by reference to high-quality corporate bonds, increased during
2018, thereby decreasing liabilities. The average discount rate
increased to 4.01% at the end of FY2018 from 3.49% in FY2017.
For historical perspective, discount rates have generally
declined from the 7.63% reported at the end of FY1999. Over
the last decade, discount rate improvements have only occurred
during three fiscal years (2013, 2015, and 2018).
The decrease in the PBO due to the higher discount rates was
able to offset the poor investment returns of -2.8%. The net
result of investment returns, discount rates, contributions, and
settlements was an increase in the funded status. The FY2018
funding deficit of $215.0 billion is a $41.5 billion improvement
over the year-end 2017 funding deficit. The discount rate
increase and the high contributions resulted in the first time in
this study that we’ve seen funded status improve in a year with
asset returns less than 0%.
FIGURE 7: PENSION SURPLUS/(DEFICIT)
Pension expense—the charge to company earnings—decreased
to $16.2 billion in FY2018 as compared with $20.3 billion during
fiscal year FY2017, a $4.1 billion decrease. The peak level of
pension expense occurred in FY2012, when it was $56.5 billion.
Based on recent and prior year disclosures, we estimate that
a majority of the Milliman 100 companies are using a “spot
rate” approach for estimating the service and interest cost
components of net periodic benefit costs.
The “spot rate” approach is a refined use of the individual
“spot” interest rates on the corporate bond yield curve used
to develop the actuarial liabilities or PBO. This contrasts with
the measurement of PBO utilizing a customized bond matching
model. The plan sponsor can choose to use only one of the
valuation methodologies, and cannot change it unless there is
agreement with the auditors to do so.
For an upwardly sloping yield curve, the use of a “spot rate”
method is expected to lower the “interest cost” component
of pension expense, thus lowering the total pension expense
in comparison with using the former single-weighted
average discount rate methodology. This method leads to an
expectation of PBO losses when the PBO is remeasured at the
end of FY2018 for pension disclosure.
FIGURE 8: PENSION SURPLUS/(DEFICIT): ASSETS AND PBO
The effect of an increase of 52 basis points in discount rates
helped to offset the poor investment returns during FY2018 and
the impact of PRT activity.
The net 7.8% decrease in pension obligations generated by the
increase in discount rates (at a median rate of 4.01% at year-end
2018, up 52 basis points from 3.49% at year-end 2017), along with
PRT activity and revisions to the life expectancy assumptions
used to measure pension plan obligations, resulted in a liability
decrease of $141.3 billion.
The 2.8% investment loss (actual weighted average return
on assets during FY2018) resulted in a decrease of $99.9
billion in the market value of plan assets after including the
high contributions and approximately $19 billion paid out in
annuity purchases or lump-sum settlements. The Milliman
100 companies had set their long-term investment return
expectations to be, on average, 6.6% during FY2018 down from
the expectation of 6.8% set for FY2017.
Funded ratios increase
The funded ratio of the Milliman 100 pension plans increased
during FY2018 to 87.1% from 85.8% at the end of FY2017.
Readers should note that not all of the 100 companies have
a fiscal year 2018 that corresponds to calendar year 2018. In
order to recognize that difference, we report a funded ratio
of 86.6% for plans with calendar fiscal years in 2018, up from
85.7% for 2017.
Sixteen companies have different fiscal year starting dates.
Their funded status at the end of FY2018 is 92.3%.
The aggregate pension deficit decreased by $33.0 billion during
these calendar year companies’ 2018 fiscal years to $202.9 billion,
from an aggregate deficit of $235.8 billion at the end of FY2017.
For fiscal year 2018, funded ratios ranged from a low of 61.4% for
American Airlines to a high of 150.9% for NextEra Energy, Inc.
FIGURE 9: FUNDED RATIO, ASSETS/PBO
The 1.3% increase in the FY2018 funded ratio added to the big
improvement seen in FY2017. Note that there has not been a
funding surplus since the 105.7% funded ratio in FY2007.
Twelve of the 84 Milliman 100 companies with calendar
fiscal years reported surplus funded status at year-end 2018,
compared with 12 companies in 2017, seven in 2016, nine in 2015,
eight in 2014, 19 in 2013, and six in 2012. These numbers pale
in comparison with the 46 companies with reported surplus
funded status at year-end 2007. Thirty-six of the Milliman 100
companies with calendar fiscal years reported an increase in
funded ratio for 2018, compared with 77 for 2017.
FIGURE 10: DISTRIBUTION BY FUNDED STATUS – 2013-2018
(CALENDAR YEAR FISCAL YEARS ONLY)
FY2018 pension expense decreases
There was a net decrease in FY2018 pension expense: a
$16.2 billion charge to earnings ($4.1 billion lower than in
FY2017). This is well below the $56.5 billion peak level in FY2012.
Thirty-one companies recorded FY2018 pension income (i.e., a
credit to earnings). Twenty-three companies recorded income in
FY2017 and 19 companies in FY2016, up from eight in FY2012.
FIGURE 11: PENSION EXPENSE (INCOME) AND CONTRIBUTIONS
The aggregate 2018 cash contributions of the Milliman 100
companies were $57.5 billion, a decrease of $4.5 billion from
the $62.0 billion contributed in 2017, and only $4.6 billion less
than the 2012 record high level of $62.1 billion. Contributions
had started to increase in 2016 to $42.7 billion from the
amounts contributed in 2015 and 2014 ($31.3 billion and
$40.2 billion, respectively).
Pension deficit decreases slightly as a
percentage of market capitalization
The total market capitalization for the Milliman 100 companies
decreased by 11.0%, which offset the decrease in pension
obligations (due to higher discount rates). This resulted in a
decrease in the unfunded pension liability as a percentage of
market capitalization of 3.0% at the end of FY2018, compared
with a decrease of 3.1% at the end of FY2017. Pension deficits
represented less than 10.0% of market capitalization for 82 of
the Milliman 100 companies in FY2018 and 85 of the Milliman
100 companies in FY2017. This is also an increase from FY2013,
when 79 companies had deficits that were less than 10.0% of
their market capitalizations.
Since FY2011, we have had investment returns exceeding
expectations in five out of eight years, which has resulted
in elevated levels of market capitalization. In FY2018, one
company’s plan deficit exceeded 50.0% of market capitalization,
down from two companies in FY2015. This is down from nine in
FY2012 and FY2011, the year we first started tracking this figure.
FIGURE 12: UNDERFUNDED PENSION LIABILITY AS A PERCENTAGE
OF MARKET CAPITALIZATION 2015-2018
The weighted average investment return on pension assets for
the 2018 fiscal years of the Milliman 100 companies was -2.8%,
which was below their average expected rates of return of 6.6%.
Two of the Milliman 100 companies exceeded their expected
returns in 2018, both with off-calendar fiscal years. Ninety-eight
companies exceeded their expected returns in 2017 and 67 in
2016. However, only four companies exceeded their expected
returns in 2015 and all four had off-calendar fiscal years. But 82
companies in 2014 exceeded their expected returns compared
with 81 in 2013, 93 in 2012, 23 in 2011, and 99 in 2010.
At the end of FY2018, total asset levels were $1.448 trillion. This
is $166 billion above the value of $1.282 trillion at the end of
FY2007, prior to the collapse of the global financial markets.
FIGURE 13: INVESTMENT RETURN ON PLAN ASSETS
During FY2018, investment losses, annuity purchases, and
lump-sum settlements were partially offset by contributions
but decreased the market value of assets by $99.9 billion. The
Milliman 100 companies’ estimated investment loss for FY2018
was $43.2 billion compared with the expected return of $97.4
billion, a difference of $140.6 billion. For the five-year period
ending in 2018, investment performance had averaged 5.6%
compounded annually (only considering plans with calendar
fiscal years). This was only the fourth year of investment losses
over the past 19 years (prior three were 2001, 2002, and 2008),
contributing to an annualized investment return of 5.8% over
that period (only considering plans with calendar fiscal years).
Expected rates of return
FIGURE 14: SPONSOR-REPORTED ASSUMED RATE OF RETURN
Companies continued to lower their expected rates of return
on plan assets to an average of 6.6% for FY2018, as compared
with 6.8% for FY2017, 7.0% for FY2016, 7.2% for FY2015, 7.3% for
FY2014, 7.4% for FY2013, 7.6% for FY2012, 7.8% for FY2011, and
8.0% for FY2010. This represents a significant drop from the
average expected rate of return of 9.4% back in FY2000.
Like last year, none of the Milliman 100 companies utilized an
expected rate of return for FY2018 of at least 9.0% (the highest
was 8.97%). Only one company had utilized an expected rate
of return of at least 9.0% in 2016, 2015, 2014, and 2013, whereas
three companies also assumed an expected rate of return of at
least 9.0% in 2012, 2011, and 2010, but this was down from five in
2009 and a high of 83 in 2000.
What to expect in 2019 and beyond
Our expectations in the coming year include:
- With tax reform in place, lowering future deductibility of
contributions made for plan years after 2017, and given the large
amounts of contributions seen over the past two years, the
expectation is for employer contributions to decrease in 2019.
- Pension expense is expected to increase compared with the
FY2018 level by approximately $16 billion. This is largely
due to investment losses experienced during 2018. Higher
discount rates may also contribute to higher interest cost
components of pension expense, given that many of the
Milliman 100 companies sponsor mature plans with primarily
- If funding levels improve, we expect plan sponsors to
continue to engage in pension de-risking activity as they
shed equity risk and explore further asset-liability matching
(ALM) and risk-hedging strategies. However, we do expect
equity levels to rise from their depressed levels at the end of
2018, assuming the strong investment performance witnessed
during the first quarter of 2019 continues.
- Further pension risk transfer activities are likely to occur in
the form of lump-sum windows and pension lift-outs as rising
PBGC premiums remain a concern for plan sponsors.
HISTORICAL VALUES (All dollar amounts in millions. Numbers may not add up correctly due to rounding.)
FIGURE 15: FUNDED STATUS
FIGURE 16: RETURN ON ASSETS
FIGURE 17: PENSION COST
FIGURE 18: ASSET ALLOCATIONS (BY PERCENTAGE)
FIGURE 19: PENSION PLAN INFORMATION BY BUSINESS SECTOR
* The Milliman 100 companies were classified based on the business sector listed for them on Yahoo Finance.
click to enlarge
FIGURE 20: OPEB FUNDED STATUS
Who are the Milliman 100 companies?
The Milliman 100 companies are the 100 U.S. public companies
with the largest defined benefit (DB) pension plan assets for
which a 2018 annual report was released by March 25, 2019.
This 2019 report is Milliman’s 19th annual study. The total value
of the pension plan assets of the Milliman 100 companies was
more than $1.44 trillion at the end of FY 2018.
About the study
The results of the Milliman 2019 Pension Funding Study (PFS)
are based on the pension plan accounting information disclosed
in the footnotes to the companies’ Form 10-K annual reports
for the 2019 fiscal year and for previous fiscal years. These
figures represent the GAAP accounting information that public
companies are required to report under Financial Accounting
Standards Board (FASB) Accounting Standards Codification
Subtopics 715-20, 715-30, and 715-60. In addition to providing the
financial information on the funded status of their U.S. qualified
pension plans, the footnotes may also include figures for the
companies’ nonqualified and foreign plans, both of which are
often unfunded or subject to different funding standards from
those for U.S. qualified pension plans. The information, data, and
footnotes do not represent the funded status of the companies’
U.S. qualified pension plans under ERISA.
Sixteen of the companies in the 2019 Milliman Pension Funding
Study had fiscal years other than the calendar year. The 2019 study
includes five new companies to reflect mergers, acquisitions, and
other corporate transactions during FY 2018. Figures quoted from
2018 reflect the 2019 composition of Milliman 100 companies and
may not necessarily match results published in the 2018 Milliman
PFS. Generally, the group of Milliman 100 companies selected
remains consistent from year to year. Privately held companies,
mutual insurance companies, and U.S. subsidiaries of foreign
parents were excluded from the study.
The results of the 2019 study will be used to update the Milliman
100 Pension Funding Index (PFI) as of December 31, 2018, the
basis of which will be used for projections in 2019 and beyond.
The Milliman 100 PFI is published on a monthly basis and
reflects the effect of market returns and interest rate changes on
pension funded status.
About the authors
Zorast Wadia, FSA, CFA, EA, MAAA, is a principal and
consulting actuary in the New York office of Milliman. He has
more than 19 years of experience in advising plan sponsors on
their retirement programs. Zorast has expertise in the valuation
of qualified and nonqualified plans. He also has expertise in the
areas of pension plan compliance, design, and risk management.
Alan H. Perry, FSA, CFA, MAAA, is a principal and consulting
actuary in the Philadelphia office of Milliman. He has more
than 28 years of experience in advising plan sponsors on asset
allocation and financial risk management. Alan specializes
in the development of investment policies by performing
asset-liability studies that focus on asset mix, liability-driven
investing, and risk hedging.
Charles J. Clark, ASA, EA, MAAA, is a principal and director
of the employee benefits research group in the Washington,
D.C., and New York offices of Milliman. He has over 38 years of
experience as a consulting actuary. Charles provides analysis
of employee benefits legislation, regulations, and accounting
standards to Milliman consultants. He has worked extensively
with plan sponsors, Washington, D.C., employee benefits trade
groups, and lawmakers on employee benefits program strategy,
design, pricing, and interpretation.
The authors thank the following Milliman colleagues for their
assistance in compiling the figures and editing the report for
the Milliman 2019 Pension Funding Study: Shweta Bedi, Kunal
Bhardwaj, Jeff Bradley, Lincoln Bressor, Keila Cohen, Ryan
Cook, Mary Der, Rebecca Driskill, Jeremy Engdahl-Johnson,
Kevin Ferris, Shagun Gaur, Nikhil Kapoor, Jamie Phillips,
Lesley Pink, Javier Sanabría, Neeraj Sharma, Amanda Sharpe,
Palak Tuteja, Divyang Varsani, Mike Wilson, Susan Yearick,
and Lynn Yu.