Pension Funding Index August 2022
The Milliman 100 PFI funded ratio decreases to 104.5% as pension liability increases outpace investment gains.
The funded status of the 100 largest corporate defined benefit pension plans decreased by $13 billion during June as measured by the Milliman 100 Pension Funding Index (PFI), breaking a six-month streak of gradual improvements. The funding surplus fell to $91 billion as a result of asset losses that outweighed liability gains during June. Pension liabilities declined due to an increase in the benchmark corporate bond interest rates used to value those liabilities. As of June 30, the funded ratio dropped to 106.3%, down from 107.1% at the end of May. The current funded ratio at mid-year is still well ahead of the 97.9% funded ratio seen at the start of 2022.
The market value of assets fell by $58 because of June’s 3.20% investment loss, which was the second largest monthly investment loss in 2022 to-date. The Milliman 100 PFI asset value decreased to $1.533 trillion as of June 30, 2022, from $1.591 trillion as of May 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) decreased by $44 billion during June, lowering the Milliman 100 PFI value to $1.441 trillion. The change resulted from an increase of 25 basis points in the monthly discount rate, to 4.59% for June from 4.34% in May. Discount rates have not been this high since December 2013.
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Note: Numbers may not add up precisely due to rounding
For the quarter ending June 30, 2022, assets have fallen precipitously – by $147 billion; however plan liabilities have decreased even further, on the order of $187 billion. While investment losses have exceeded 7.55% during the second quarter, discount rates have climbed by 97 basis points and have had a much greater impact on funded status. The net result was a funded status improvement of $40 billion. The funded status surplus grew to $91 billion by the end of the second quarter. The funded ratio of the Milliman 100 companies increased to 106.3% at the end of June from 103.2% at the end of March.
Over the last 12 months (July 2021 – June 2022), the cumulative asset loss for these pensions has been 8.9% and yet the Milliman 100 PFI funded status deficit has improved by $165 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 185 basis points to 4.59% from 2.74% one year ago. The funded ratio of the Milliman 100 companies has improved significantly over the past 12 months, to 106.3% from 96.1%.
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 4.59% 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 $104 billion (funded ratio of 107.3%) by the end of 2022 and a projected pension surplus of $131 billion (funded ratio of 109.2%) 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 4.89% by the end of 2022 and 5.49% by the end of 2023) and asset gains (9.90% annual returns), the funded ratio would climb to 113% by the end of 2022 and 128% by the end of 2023. Under a pessimistic forecast with similar interest rate and asset movements (4.29% discount rate at the end of 2022 and 3.69% by the end of 2023 and 1.90% annual returns), the funded ratio would decline to 101% by the end of 2022 and 92% 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.