Milliman Analysis: Funded status plummets
in June, was Brexit to blame?
Discount rates fell 23 basis points in
June, the U.K. filed for divorce from the EU,
pension trusts’ fixed income investments
reaped a gain but funded status eroded
by $46 billion. The funded status deficit
for the Milliman 100 plans settled at
$447 billion at the end of June, having
risen by $140 billion so far in 2016.
|Note: Numbers may not add up precisely due to rounding
The funded status of the 100 largest corporate defined benefit
pension plans dropped by $46 billion during June as measured
by the Milliman 100 Pension Funding Index (PFI). The deficit
rose to $447 billion at the end of June, primarily due to a
decrease in the benchmark corporate bond interest rates used
to value pension liabilities. As of June 30, the funded ratio
decreased to 75.7%, down from 77.5% at the end of May.
The decision of the U.K. to separate themselves from the other
27 European Union countries will cause the most damage (compared
to expectations) to the balance sheet of employers with a fiscal
year that ends on June 30, 2016, and collateral damage to pension
cost for fiscal years starting on July 1, 2016. The impact on pension
cost could vary depending on the selection of a mark-to-market
methodology or smoothing of gains and losses.
The projected benefit obligation (PBO), or pension liabilities,
increased to $1.839 trillion at the end of June from $1.785 trillion
at the end of May. The change resulted from a decrease of 23
basis points in the monthly discount rate to 3.45% for June, from
3.68% for May. The discount rate at the end of June is the lowest
it has been in 2016 and is the second lowest in the 16-year
history of the Milliman 100 PFI. Only the January 2015 discount
rate of 3.41% was lower. We note that the funded status deficit
in January 2015 was $427 billion. The highest funded status
deficit in dollars was $480 billion in October 2012.
FIGURE 1: MILLIMAN 100 PENSION FUNDING INDEX PENSION SURPLUS/DEFICIT
FIGURE 2: MILLIMAN 100 PENSION FUNDING INDEX — PENSION FUNDED RATIO
June’s discount rate decline was not all bad news for those
plan sponsors with heavy allocations towards fixed income.
The market value of assets of the Milliman 100 plans increased
by $9 billion as a result of June’s investment gain of 1.01%. The
Milliman 100 PFI asset value increased to $1.393 trillion at the
end of June. By comparison, the 2016 Milliman Pension Funding
Study reported that the monthly median expected investment
return during 2015 was 0.58% (7.2% annualized).
Discount rates had been steadily falling for the past 12 months
and Brexit appropriately closed fiscal years ending June 30,
2016, with a resounding thud. U.S. discount rates and equity
holdings certainly weren’t immune to the Brexit pain. As a
proxy to measure the impact of the decline in funded status
over the past 12 months ending June 30, 2016, we estimate
that pension expense for the fiscal year ending June 30, 2017,
would increase by approximately $24 billion if all the Milliman
100 companies had June 30 fiscal year ends. Compared to the
aggregate pension expense figure of $33.7 billion recorded at
the end of 2015 for the Milliman 100 companies as noted in the
2016 Milliman Pension Funding Study, this would represent an
increase of roughly 71% in pension expense. This disposition
is significantly worse compared to where we started the year
when discount rates were 4.16% and the funded status deficit
was $307 billion as of January 1.
Second Quarter 2016 Summary
For the quarter ending June 30, 2016, assets experienced a net
investment gain of 2.37% with returns ahead of expectations.
However, discount rates fell by 33 basis points in that same
quarter negating any hopes of an improvement in funded status.
The funded status deficit ballooned to $447 billion by the end
of the second quarter from $387 billion at the end of March.
The funded ratio of the Milliman 100 companies decreased to
75.7% at the end of June from 78.1% at the end of March primarily
due to interest rate decreases during this period.
Over the last 12 months (July 2015 – June 2016), the cumulative
asset return for these pensions has been 3.26% and the Milliman
100 PFI funded status deficit has deteriorated by $195 billion.
The rise in the funded status deficit over the past 12 months
is due to the dual effect of decreases in discount rates and
less-than-expected investment returns. The funded ratio of the
Milliman 100 companies has decreased over the past 12 months
to 75.7% from 85.0%.
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 3.45% 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 $431 billion (funded ratio of 76.6%) by the
end of 2016 and a projected pension deficit of $397 billion
(funded ratio of 78.4%) by the end of 2017. For purposes of this
forecast, we have assumed 2016 aggregate contributions of
$33 billion and 2017 aggregate contributions of $36 billion.
Under an optimistic forecast with rising interest rates (reaching
3.75% by the end of 2016 and 4.35% by the end of 2017) and
asset gains (11.2% annual returns), the funded ratio would
climb to 81% by the end of 2016 and 93% by the end of 2017.
Under a pessimistic forecast with similar interest rate and asset
movements (3.15% discount rate at the end of 2016 and 2.55% by
the end of 2017 and 3.2% annual returns), the funded ratio would
decline to 72% by the end of 2016 and 66% by the end of 2017.
MILLIMAN 100 PENSION FUNDING INDEX — MAY 2016 (ALL DOLLAR AMOUNTS IN MILLIONS)
PENSION ASSET AND LIABILITY RETURNS
About the Milliman 100 Monthly Pension Funding Index
For the past 16 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 2015 fiscal year and for previous fiscal years. This pension
plan accounting disclosure information was summarized
as part of the Milliman 2016 Pension Funding Study, which
was published on April 6, 2016. 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