About the Milliman 100 monthly Pension Funding Index

How are the 100 largest U.S. corporate pension plans faring on a monthly basis? How are market conditions and interest rate movements affecting the funded status of these plans? This monthly index projects the funded status for pension plans included in the Milliman Pension Funding Study, reflecting the effect of market returns on plan assets and the impact of interest-rate changes on plan liabilities. The monthly Pension Funding Index offers an ongoing assessment of the often volatile movements that have come to characterize corporate pension funding.

For the past 12 years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies. The Milliman 100 Pension Funding Index projects the funded status for pension plans included in our study, reflecting the impact of market returns and interest-rate changes on pension funded status, utilizing the actual reported asset values, liabilities, and asset allocations of the companies’ pension plans.

The results of the Milliman 100 Pension Funding Index were based on the actual pension plan accounting information disclosed in the footnotes to the companies’ annual reports for the 2010 fiscal year and for previous fiscal years. The 2011 Milliman 100 Pension Funding Study was published on March 29, 2011. In addition to providing the financial information on the funded status of 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 than those for U.S. qualified pension plans. They do not represent the funded status of the companies’ U.S. qualified pension plans under ERISA.

Milliman analysis: Pension plans off to a good start in 2012 as funded status improves by two percentage points

The funded status of the 100 largest corporate defined benefit pension plans improved by $30 billion during January as measured by the Milliman 100 Pension Funding Index (PFI). The deficit declined to $434 billion from $464 billion at the end of December 2011, primarily due to January’s strong investment gains. The benchmark corporate bond interest rates used to value pension liabilities remained flat in January. As of January 31, the funded ratio increased to 74.2%, up from 72.4% at the end of December 2011.

January’s $30 billion increase in market value brings the Milliman 100 PFI asset value to $1.251 trillion, up from $1.221 trillion at the end of December 2011, based on an investment gain of 2.49% for the month. January’s one-month gain is striking in comparison to the full year 2011 investment gain of 3.02%. By comparison, the 2011 Milliman Pension Funding Study published in March 2011 reported that the median expected investment return during 2010 was 0.64% (8.00% annualized). The expected rate of return for 2011 will be updated in the 2012 Milliman Pension Funding Study, due out on March 28.

The projected benefit obligation (PBO), or pension liabilities, held their ground as the Milliman 100 PFI value stood at $1.685 trillion at the end of January. At the end of the month, the discount rate that determines the PBO stood at 4.26%, a paltry increase of only one basis point in January.

Over the last 12 months (February 2011 – January 2012), the cumulative asset return for these pensions has been 4.75% and the Milliman 100 PFI funded status has plummeted by 250 billion. The primary reason for the funded status erosion has been the lower trending discount rates seen throughout most of 2011. For these 12 months, the funded ratio of the Milliman 100 companies decreased to 74.2% from 86.9%.

2012-2013 projections

If the Milliman 100 PFI companies were to achieve an annual 8.0% median asset return (as per the 2011 pension funding study) expected for their pension plan portfolios and the current discount rate of 4.26% was maintained during years 2012 and 2013, we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $357 billion (funded ratio of 79.0%) by the end of 2012 and a projected pension deficit of $269 billion (funded ratio of 84.4%) by the end of 2013. For purposes of this forecast, we have assumed 2012 - 2013 aggregate contributions to increase by 40% over their 2010 contribution level, which was already a record $60 billion.

Under an optimistic forecast with rising interest rates (reaching 4.81% by the end of 2012 and 5.41% by the end of 2013) and asset gains (12.0% annual returns), the funded ratio would climb to 88% by the end of 2012 and 106% by the end of 2013. Under a pessimistic forecast with similar interest rate and asset movements (3.71% discount rate by the end of 2012 and 3.11% by the end of 2013 and 4.0% annual returns), the funded ratio would decline to 70% by the end of 2012 and 66% by the end of 2013.