Pension Funding Index, January 2013

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By John W. Ehrhardt, Zorast Wadia | 07 January 2013

The funded status increased by $53.7 billion during December 2012, ending a volatile year on a positive note for the 100 largest corporate defined benefit pension plans measured by the Milliman 100 Pension Funding Index (PFI). Historically low interest rates were the dominant factor in the $74.4 billion deficit increase during 2012. While higher-than-expected investment returns produced a solid $90.4 billion gain, pension liabilities increased by $164.8 billion. The funded ratio was 76.4% as of December 31, 2012, down from 78.7% at the beginning of the year but still above the historical low funded ratio of 70.5% set in May 2003.

The $74.4 billion deficit increase during 2012 resulted in a year-end funded status deficit of $411.8 billion, the largest deficit at year-end in the 12 year history of the Milliman 100 PFI. The loss in funded status during 2012 resulted in a charge to corporate balance sheets at the end of the 2012 fiscal year and is expected to produce an estimated increase of $9.2 billion in pension expense for 2013.

While 2012 ended on a positive note, the road ahead appears shaky as Federal Reserve Chairman Ben Bernanke has indicated the Fed’s intention to keep interest rates unchanged from the current lows until the unemployment rate reaches 6.5%. If low discount rates are sustained, the only two ways for the funded status to improve are by exceptional investment returns and/or higher cash contributions by plan sponsors.

Read the latest Pension Funding Index »