Aggregate 83% funding ratio is highest since 2008; however, critical plans still struggle
Multiemployer pension funds reached their highest funding level since 2008, according to Milliman's spring 2018 study released Wednesday.
As of Dec. 31, 2017, the plans achieved an aggregate funding ratio of 83%, compared to 85% a decade ago and 81% as of June 30. That represents a $15 billion decline in funding shortfalls for the six months ended Dec. 31, down to $110 billion.
Milliman's Multiemployer Pension Funding Study analyzes the funded status of all multiemployer pension plans in the U.S.
Good investment returns contributed the most to the improved funding level, along with increased contributions and benefit reductions. Estimated returns in 2017 of nearly 16% were more than double most plans' assumed returns. Projections were based on a simplified portfolio of 45% U.S. equities, 20% international equities and 35% U.S. fixed income.
Those "stellar" returns did not help plans with a critical funded status because of their cash-flow demands, said Milliman principal and report author Kevin M. Campe in a statement. "Critical plans are sinking in quicksand and not able to benefit enough from strong investment returns."
The aggregate funding ratio for critical plans, which are those plans that are less than 65% funded, was stuck at 60%. In 2008, those same plans had an aggregate funding ratio of 76%. "It's been almost 10 years since the global financial crisis, and while healthier plans have gotten their funded status levels back to where they were then, critical plans have not," Mr Campe said.
By contrast, healthy plans saw their funding ratio reach 93% by the end of 2017, up from 90% a decade ago. Healthier plans are more likely to have lower negative cash flow and fewer inactive vs. active participants. They also allocate more contributions to their funding shortfalls, the study noted.
The study is based on publicly available Form 5500 data as of February this year for 1,200 to 1,300 plans, depending on the measurement date used. Milliman said some data that appeared to be erroneous were modified.
Assumed returns are generally between 6% and 8%, which leads to a weighted average assumption of 7.34%, compared to 7.43% in the previous study. That decrease was due primarily to the $15.3 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., lowering its return assumption to 6.25% from 7.5%.
The study is available on Milliman's website.