Milliman analysis: Corporate pension funded status drops
by $22 billion in August as discount rates fall below 4%
and reach an all-time low
Blistering 1.92% investment gain adds $24 billion to the asset total, but it is not
enough to offset a $46 billion increase in liabilities, raising the Milliman 100 PFI
funded status deficit to $281 billion
The funded status of the 100 largest corporate defined benefit
pension plans deteriorated by $22 billion during August as
measured by the Milliman 100 Pension Funding Index (PFI). The
deficit increased to $281 billion from $259 billion at the end of
July, due to a drop in the benchmark corporate bond interest rates
used to value pension liabilities. August’s robust investment gain
was not enough to improve the Milliman 100 PFI’s funded status.
As of August 31, the funded ratio dropped to 84.0%, down from
84.8% at the end of July.
The projected benefit obligation (PBO), or pension liabilities,
increased by $46 billion during August, raising the Milliman 100 PFI
value to $1.754 trillion from $1.708 trillion at the end of July. The PBO
change resulted from a decrease of 21 basis points in the monthly
discount rate to 3.89% for August, from 4.10% for July. The August 31
discount rate of 3.89% is the lowest ever recorded in the 14-year
history of the Milliman 100 PFI.
Discount rates have decreased by 79 basis points during the first
eight months of 2014, resulting in a liability increase of $165 billion.
This decrease completely erases the interest rate increase of
72 basis points that occurred in calendar year 2013. Fortunately,
the strong year-to-date asset performance has mitigated deeper
funded status erosion.
The market value of assets increased by $24 billion as a result of
August’s investment gain of 1.92%. The Milliman 100 PFI asset value
increased to $1.473 trillion, up from $1.449 trillion at the end of July.
By comparison, the 2014 Milliman Pension Funding Study reported
that the monthly median expected investment return during 2013
was 0.60% (7.4% annualized).
Over the last 12 months ( September 2013 to August 2014), the
cumulative asset return for these pensions has been 14% but the
Milliman 100 PFI funded status deficit has worsened by $44 billion.
The drop in funded status over the past 12 months is primarily
due to the decline in interest rates. Since August 31, 2013, the
discount rate has dropped 88 basis points, to 3.89% from 4.77%.
The funded ratio of the Milliman 100 companies has decreased
over the past 12 months, to 84.0% from 84.9%.
2014-2015 PROJECTIONS: ADJUSTED FOR EFFECT OF HATFA
If the Milliman 100 PFI companies were to achieve the expected
7.4% (as per the 2014 Milliman Pension Funding Study) median
asset return for their pension plan portfolios and the current discount
rate of 3.89% were maintained during 2014 and 2015, we forecast
that the funded status of the surveyed plans would increase. This
would result in a projected pension deficit of $265 billion (funded
ratio of 84.9%) by the end of 2014 and a projected pension deficit
of $228 billion (funded ratio of 87.1%) by the end of 2015.
For purposes of this forecast, we have assumed 2014 aggregate
contributions of $44 billion and 2015 aggregate contributions
of $31 billion. The drop in contribution expectations for 2015 is
reflective of the passage of the Highway and Transportation Funding
Act of 2014 (HATFA), which was signed into law on August 8 and
extended the MAP-21 interest-rate relief provisions for defined
benefit plan sponsors. While we expect many of the Milliman 100
companies to make contributions above the minimum requirements,
we also expect some plan sponsors who are cash strapped to take
advantage of the available contribution relief.
Under an optimistic forecast with rising interest rates (reaching
4.09% by the end of 2014 and 4.69% by the end of 2015) and
asset gains (11.4% annual returns), the funded ratio would climb to
88% by the end of 2014 and 101% by the end of 2015. Under a
pessimistic forecast with similar interest rate and asset movements
(3.69% discount rate at the end of 2014 and 3.09% by the end of
2015 and 3.4% annual returns), the funded ratio would decline to
82% by the end of 2014 and 75% by the end of 2015.
About the Milliman 100 Monthly Pension Funding Index
For the past 14 years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public
companies. The Milliman 100 Pension Funding Index projects the funded status for pension plans included in our study, reflecting the
impact of market returns and interest rate changes on pension funded status, utilizing the actual reported asset values, liabilities, and asset
allocations of the companies’ pension plans.
The results of the Milliman 100 Pension Funding Index were based on the actual pension plan accounting information disclosed in the
footnotes to the companies’ annual reports for the 2013 fiscal year and for previous fiscal years. This pension plan accounting disclosure
information was summarized as part of the Milliman 2014 Pension Funding Study, which was published on April 2, 2014. In addition to
providing the financial information on the funded status of U.S. qualified pension plans, the footnotes may also include figures for the
companies’ nonqualified and foreign plans, both of which are often unfunded or subject to different funding standards than those for U.S.
qualified pension plans. They do not represent the funded status of the companies’ U.S. qualified pension plans under ERISA.