Pension Funding Index September 2015

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By John W. Ehrhardt, Zorast Wadia | 09 September 2015

In August, the funded status of the 100 largest corporate defined benefit pension plans worsened by $22 billion as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose to $282 billion primarily due to these August investment losses. As of August 31, the funded ratio dropped to 83.4%, down from 84.9% at the end of July. Adding in July’s loss, the funded status deficit has grown by $36 billion in the third quarter.

The market value of assets plummeted by $42 billion as a result of August’s investment loss of 2.51%. The Milliman 100 PFI asset value decreased to $1.417 trillion from $1.459 trillion at the end of July. The August investment loss was the largest loss in the last six years. The last time pension assets of the Milliman 100 PFI fell by $42 billion was in February 2009.

The projected benefit obligation (PBO), or pension liabilities, decreased by $20 billion during August, lowering the Milliman 100 PFI value to $1.699 trillion from $1.718 trillion at the end of July. The PBO change resulted from an increase of nine basis points in the monthly discount rate to 4.23% for August from 4.14% for July.

Over the last 12 months (September 2014-August 2015), the cumulative asset return for these pensions has been 1.85% and yet the Milliman 100 PFI funded status has improved by $22 billion. The rise in funded status over the last 12 months is primarily due to increases in discount rates experienced throughout much of 2015 after initially beginning the year below the 4% mark.

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 4.23% were maintained in 2015 and 2016, we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $272 billion (funded ratio of 84%) by the end of 2015 and a projected pension deficit of $236 billion (funded ratio of 86.2%) by the end of 2016.