London Market Monitor – 31 August 2022
Our August review of the markets and Solvency II discount rates.
The funded status of the 100 largest corporate defined benefit pension plans decreased by $19 billion during July as measured by the Milliman 100 Pension Funding Index (PFI), marking the second consecutive month of downward movement. The funding surplus fell to $67 billion as a result of liability increases, which offset asset gains during July. Pension liabilities soared due to a decrease in the benchmark corporate bond interest rates used to value those liabilities. As of July 31, the funded ratio dropped to 104.5%, down from 105.9% at the end of June. Despite the decline, July is the sixth consecutive month in which “full funding” has been achieved.
The market value of assets increased by $39 billion because of July’s stellar 2.98% investment gain, which was the largest monthly investment return in 2022 to date. The Milliman 100 PFI asset value improved to $1.565 trillion as of July 31, 2022. By comparison, the 2022 Milliman Pension Funding Study reported that the monthly median expected investment return during 2021 was 0.48 (5.9% annualized). The full results of the annual 2022 study can be found at www.milliman.com/pfs.
The Milliman 100 PFI projected benefit obligation (PBO) increased by $57 billion during July, raising the Milliman 100 PFI value to $1.499 trillion. This change was the result of a 34-basis point decrease in the monthly discount rate, from 4.59% in June to 4.25% for July. July marks the first month of 2022 where the discount rates have fallen, however year-to-date discount rates are still up 145 basis points for the Milliman 100 plans.
Over the last 12 months (August 2021 – July 2022), the cumulative asset loss for these pensions has been 7.5% and yet the Milliman 100 PFI funded status deficit has improved by $170 billion. The funded status gain is primarily the result of significant increases in discount rates over the past 12-month period. Discount rates increased by 166 basis points to 4.25% from 2.59% one year ago. The funded ratio of the Milliman 100 companies has improved significantly over the past 12 months, to 104.5% from 94.6%.
|MV||PBO||FUNDED STATUS||FUNDED PERCENTAGE|
Note: Numbers may not add up precisely due to rounding
If the Milliman 100 PFI companies were to achieve the expected 5.9% median asset return (as per the 2022 PFS), and if the current discount rate of 4.25% were maintained during 2022 and 2023, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension surplus of $79 billion (funded ratio of 105.3%) by the end of 2022 and a projected pension surplus of $109 billion (funded ratio of 107.4%) by the end of 2023. For purposes of this forecast, we have assumed 2022 and 2023 aggregate annual contributions of $20 billion.
Under an optimistic forecast with rising interest rates (reaching 4.50% by the end of 2022 and 5.10% by the end of 2023) and asset gains (9.90% annual returns), the funded ratio would climb to 110% by the end of 2022 and 125% by the end of 2023. Under a pessimistic forecast with similar interest rate and asset movements (4.00% discount rate at the end of 2022 and 3.40% by the end of 2023 and 1.90% annual returns), the funded ratio would decline to 101% by the end of 2022 and 91% by the end of 2023.
For the past 22 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 2021 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2022 Pension Funding Study, which was published on April 28, 2022. 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.