Pension Funding Index April 2015

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By John W. Ehrhardt, Zorast Wadia | 22 April 2015

The funded status of the 100 largest corporate defined benefit pension plans dropped by $6 billion during March as measured by the Milliman 100 Pension Funding Index (PFI). The deficit increased to $349 billion from $343 billion at the end of February because of the dual effect of a decline in the benchmark corporate bond interest rates used to value pension liabilities and flat asset performance in March. As of March 31, the funded ratio fell to 81%, down from 81.2% at the end of February.

March’s flat investment performance led to a decrease in Milliman 100 PFI asset value to $1.483 trillion from $1.485 trillion at the end of February, based on an investment gain of 0.25% for the month. The projected benefit obligation (PBO), or pension liabilities, increased by $4 billion during March, raising the Milliman 100 PFI value to $1.832 trillion from $1.828 trillion at the end of February. The change resulted from a small decrease of two basis points in the monthly discount rate to 3.65% for March, from 3.67% in February. There have now been five consecutive months with discount rates below 4.00%.

For the quarter ended March 31, 2015, the assets had a net investment gain of 3.01%. Since the start of 2015, the funded status has deteriorated by $18 billion, primarily due to reductions in the discount rate. The funded ratio of the Milliman 100 companies decreased to 80% at the end of March from 81.5% at the end of December.

Over the last 12 months (April 2014 to March 2015), the cumulative asset return for these pensions has been 10.35%, and the Milliman 100 PFI funded status deficit has worsened by $96 billion. The main reason for the decrease in the funded status deficit has been the unceasing decline in discount rates.

If the Milliman 100 PFI companies were to achieve the expected 7.3% (as per the 2015 pension funding study) median asset return for their pension plan portfolios and the current discount rate of 3.65% were maintained in 2015 and 2016, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $321 billion by the end of 2015 and a projected pension deficit of $278 billion by the end of 2016.