In August, the funded status of the 100 largest corporate defined benefit pension plans dropped by $4 billion as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose to $456 billion at the end of August due to the dual effect of a decrease in the benchmark corporate bond interest rates used to value pension liabilities and flat investment returns. As of August 31, the funded ratio remained flat at 75.7% compared to 75.8% at the end of July. This makes it three consecutive months where the funded status has barely shifted from its low mark in 2016.
The projected benefit obligation (PBO), or pension liabilities, increased to $1.871 trillion at the end of August from $1.868 trillion at the end of July. The change resulted from a decrease of one basis point in the monthly discount rate to 3.32% for August from 3.33% for July. While the discount rate barely changed in August, we note that it is the lowest discount rate in the 16-year history of the Milliman 100 PFI.
The market value of assets of the Milliman 100 plans remained static at $1.416 trillion as a result of August’s investment gain of 0.35%. This is coming off a particularly strong return month during July where pension assets boasted an investment gain of 2.17%. Assets for the Milliman 100 companies are up 6.27% year-to-date.
Over the last 12 months (September 2015 – August 2016), the cumulative asset return for these pensions has been 7.42%; however, the Milliman 100 PFI funded status deficit has deteriorated by $164 billion. The rise in the funded status deficit over the past 12 months is primarily due to decreases in discount rates, to the tune of 91 basis points.
If the Milliman 100 PFI companies were to achieve the expected 7.2% median asset return (as per the 2016 pension funding study), and if the current discount rate of 3.32% 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 $445 billion (funded ratio of 76.2%) by the end of 2016 and a projected pension deficit of $409 billion (funded ratio of 78.2%) by the end of 2017.