{"id":3515,"date":"2016-12-05T18:39:36","date_gmt":"2016-12-05T18:39:36","guid":{"rendered":"http:\/\/63.247.133.14\/~vaniwaar\/?p=3515"},"modified":"2016-12-05T18:39:36","modified_gmt":"2016-12-05T18:39:36","slug":"2016-pension-accounting-preview-positive-outlook","status":"publish","type":"post","link":"https:\/\/viaactuarial.com\/2016\/12\/05\/2016-pension-accounting-preview-positive-outlook\/","title":{"rendered":"2016 Pension Accounting Preview: a Positive Outlook"},"content":{"rendered":"

Many defined benefit (DB) plan sponsors are aware that interest rates dropped significantly in the first half of 2016 but staged a remarkable rise since the November election. Combined with relatively strong equity returns, 2016 year-end pension disclosures may not be as bad as expected 6 to 8 weeks ago.<\/p>\n

Discount Rate Analysis<\/u><\/strong><\/p>\n

Using the November 2016 Citi Pension Liability Index (CPLI) and Citi Pension Discount Curve (CPDC) as proxies, pension accounting discount rates are down by about 20 basis year-to-date. Although they\u2019re not quite up to 2015 year-end levels, the rebound (from almost 90 bps lower than last year) is welcome relief to pension plans.<\/p>\n

In the chart below, we compare the CPDC at three different measurement dates (12\/31\/2014, 12\/31\/2015, and 11\/30\/2016). We also highlight the CPLI at each measurement date. The CPLI can be thought of as the average discount rate produced by the curve for an \u201caverage\u201d pension plan.<\/p>\n

\"nov-2016-citigroup-curve\"<\/a><\/p>\n

Net Effect on Balance Sheet Liability<\/u><\/strong><\/p>\n

The other half of the pension funded status equation is the plan asset return. Like discount rates, it\u2019s been a bumpy year but it appears to be ending in the right direction. Domestic stock indices are doing well and a balanced portfolio is likely at or above its expected return.<\/p>\n

Depending on the starting funded status, the change in pension liabilities and assets can have a leveraging effect on the reported net balance sheet asset\/liability.<\/p>\n

Below is a simplified illustration for a plan that was 80% funded on 12\/31\/2015. We assume a 5% increase in pension liability during 2016 and then compare the funded status results under two asset scenarios: (1) Assets 5% higher than 12\/31\/2015 and (2) Assets 8% higher than 12\/31\/2015.<\/p>\n

\"illustration-of-change-nov-16\"<\/a><\/p>\n

In the first scenario, the plan\u2019s funded percent remains constant at 80% even though the dollar amount of pension debt increases by about 5%. In the second scenario, the funded status actually improves slightly both on a percent and dollar basis.<\/p>\n

Conclusions<\/u><\/strong><\/p>\n

So, what should plan sponsors be considering over the next month as we approach year-end? Here are a few ideas.<\/p>\n