In June, the funded status of the 100 largest corporate defined benefit pension plans dropped by $46 billion as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose to $447 billion at the end of June, primarily due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. As of June 30, the funded ratio decreased to 75.7%, down from 77.5% at the end of May.
The decision of the U.K. to separate itself from the other 27 European Union countries will cause the most damage to the balance sheet of employers with a fiscal year that ends on June 30, 2016, and collateral damage to pension cost for fiscal years starting on July 1, 2016.
The projected benefit obligation (PBO) increased to $1.839 trillion at the end of June from $1.785 trillion at the end of May. The discount rate at the end of June is the lowest it has been in 2016 and the second lowest in the 16-year history of the Milliman PFI.
The market value of assets of the Milliman 100 plans increased by $9 billion as a result of June’s investment gain of 1.01%. The Milliman 100 PFI asset value increased to $1.393 trillion at the end of June.
As a proxy to measure the impact of the decline in funded status over the past 12 months ending June 30, 2016, we estimate that pension expense for the fiscal year ending June 30, 2017, would increase by approximately $24 billion if all the Milliman 100 companies had June 30 fiscal year ends.
Over the last 12 months (July 2015– June 2016), the cumulative asset return for these pensions has been 3.26% and the Milliman 100 PFI funded status deficit has deteriorated by $195 billion. The funded ratio of the Milliman 100 companies has decreased over the past 12 months to 75.7% from 85.0%.
If the Milliman 100 PFI companies were to achieve the expected 7.2% median asset return and if the current discount rate of 3.45% were maintained during years 2016 and 2017, we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $431 billion by the end of 2016 and a projected pension deficit of $397 billion by the end of 2017.