Workscape Institute

In November, the Milliman 100 Pension Funding Index (“the Index”) declined 8% or $95 billion in funded status. The $30 billion loss reduces the value of assets in the Index from $986 billion to $956 billion during the month of November.

The November decline follows on the heels of a sizeable $120 billion asset loss in October. However, the November asset loss was coupled with a decrease in interest rates. Decreasing interest rates increased liabilities by $65 billion.  As a result, many companies may face serious funding shortfalls.

How serious?

Follow up:

We estimate that companies in the Index will take about a $60 billion hit in earnings in 2009, unless the markets recover significantly. The corresponding impact on ERISA funding requirements under the new PPA funding rules will produce similar consequences to cash funding requirements. These possible consequences include reduced benefits, job losses, and impaired retirement security. In this light, we have been working with The ERISA Industry Committee (ERIC) and the American Benefits Council (ABC) in urging Congress to make technical corrections to the Pension Protection Act of 2006 (“PPA”). At the very least, we are seeking temporary relief this year from the PPA’s provisions that are causing volatile funding obligations for pension plan sponsors.

Because the pace -- and outcome -- of any legislative process are uncertain, Milliman is already working with many of its clients to devise strategies that minimize increases in current pension expense while protecting the long-term interests of all stakeholders. Generally, the first step is to evaluate the plan’s current funded status. The PPA put in place new rules that can trigger the restriction of certain benefit payments if a plan fails to meet the required funding percentages.

Fortunately, options exist that may help pension funds meet their targets in spite of asset losses. One of these is asset averaging, which may permit plans to recognize higher asset levels, essentially 110% of market value as of 1/1/2009. Another strategy is the use of current spot discount rates, which, in many cases will significantly decrease liabilities. We discuss these options in detail in our Client Action Bulletin, “Strategies for Pension Plans in the Global Financial Crisis,” dated October 28, 2008.

The Client Action Bulletin also discusses elements of pension funds’ investment strategies that need to be monitored and, possibly, adjusted over the next several months. Of course fundamental investment policies such as asset allocation are long-term in nature and already account for periods of market upheaval.

However, there are opportunities to fine-tune specific elements of the investment program on a tactical basis. These include adjusting the portfolio rebalancing plan over the next six to 12 months and lengthening the duration of the fixed income portfolio in anticipation of a return to normal credit spreads.

Milliman can also help you to review risk management practices to help ensure your program’s funded status remains as strong as possible. And, if the markets’ extreme volatility is exceeding your risk tolerance, we can help you consider the costs and benefits of transitioning to a liability-driven investing approach, designed to “immunize” your fund from market risk.