London Market Monitor – 31 August 2022
Our August review of the markets and Solvency II discount rates.
The Milliman 100 PFI funded ratio decreased to 97.2% as liability rises exceeded asset gains due to a decline in the discount rate
The funded status of the 100 largest corporate defined benefit pension plans decreased by $30 billion during June as measured by the Milliman 100 Pension Funding Index (PFI). Between October 2020 and May 2021, funded status improved by around $250 billion. June’s decline gave back 12% of that gain. The deficit grew to $52 billion based on liability losses outweighing asset gains during June. Pension liabilities rose due to a decrease in the benchmark corporate bond interest rates used to value those liabilities. As of June 30, the funded ratio dropped to 97.2%, down from 98.8% at the end of May. The current funded ratio at mid-year is still well ahead of the funded ratio of 90.3% seen at the start of 2021.
June’s solid 1.46% investment return raised the Milliman 100 PFI asset value by $20 billion to $1.826 trillion from $1.806 trillion at the end of May. By comparison, the 2021 Milliman Pension Funding Study reported that the monthly median expected investment return during 2020 was 0.50 (6.2% annualized). The full results of the annual 2021 study can be found at milliman.com/pfs. June’s above-average asset return caps a strong second quarter of returns.
|MV||PBO||FUNDED STATUS||FUNDED PERCENTAGE|
Note: Numbers may not add up precisely due to rounding
The projected benefit obligation (PBO) also rose during June, increasing the Milliman 100 PFI value to $1.878 trillion. The change resulted from a decrease of 20 basis points in the monthly discount rate to 2.74% for June, from 2.94% in May. Aside from March’s discount rate of 3.12%, all other discount rates have been below 3.00% in the past 12 months.
For the quarter ending June 30, 2021, assets increased by $69 billion compared to plan liabilities which increased by $89 billion. While investment returns exceeded expectations during the second quarter, discount rates falling by 38 basis points had a much greater impact on funded status. The net result was a funded status worsening of $20 billion. The funded status deficit grew to $52 billion by the end of the second quarter. The funded ratio of the Milliman 100 companies decreased to 97.2% at the end of June from 98.2% at the end of March.
Over the last 12 months (July 2020 – June 2021), the cumulative asset return for these pensions has been 15.3% and the Milliman 100 PFI funded status deficit has improved by $246 billion. Discount rates have shown a small net increase over the last twelve months of just nine basis points. The funded ratio of the Milliman 100 companies has improved significantly over the past 12 months to 97.2% from 84.6%.
If the Milliman 100 PFI companies were to achieve the expected 6.2% median asset return (as per the 2021 PFS), and if the current discount rate of 2.74% were maintained during 2021 and 2022, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $24 billion (funded ratio of 98.7%) by the end of 2021 and a projected pension surplus of $38 billion (funded ratio of 102.1%) by the end of 2022. For purposes of this forecast, we have assumed 2021 and 2022 aggregate annual contributions of $25 billion and $28 billion, respectively.
Under an optimistic forecast with rising interest rates (reaching 3.04% by the end of 2021 and 3.64% by the end of 2022) and asset gains (10.2% annual returns), the funded ratio would climb to 105% by the end of 2021 and 122% by the end of 2022. Under a pessimistic forecast with similar interest rate and asset movements (2.44% discount rate at the end of 2021 and 1.84% by the end of 2022 and 2.2% annual returns), the funded ratio would decline to 93% by the end of 2021 and 85% by the end of 2022.
For the past 21 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 2020 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2021 Pension Funding Study, which was published on April 7, 2021. 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.