Pension Funding Index May 2015

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By John W. Ehrhardt, Zorast Wadia | 07 May 2015

The funded status of the 100 largest corporate defined benefit pension plans increased by $40 billion during April as measured by the Milliman 100 Pension Funding Index (PFI). The funded status deficit fell to $311 billion at the end of April primarily due to an increase in the benchmark corporate bond interest rates used to value pension liabilities. As of April 30, the funded ratio rose to 82.6%, up from 80.9% at the end of March.

The projected benefit obligation (PBO), or pension liabilities, decreased by $42 billion during April, lowering the Milliman 100 PFI value to $1.791 trillion. The change was due to an increase of 17 basis points in the monthly discount rate to 3.82% for April from 3.65% for March. That makes it six consecutive months with historically low sub-4.00% discount rates.

Over the last 12 months (May 2014 to April 2015), the cumulative asset return for these pensions has been 9.64% and the Milliman 100 PFI funded status deficit has worsened by $41 billion. The main reason for the decrease in the funded status deficit has been the drop in discount rates experienced over the last 12 months. The discount rate as of a year ago (on April 30, 2014) was 4.20%, 38 basis points higher than where it stands as of April 30, 2015.

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 3.82% 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 $286 billion (funded ratio of 84.1%) by the end of 2015 and a projected pension deficit of $244 billion (funded ratio of 86.4%) by the end of 2016.