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 increased by $48 billion during April as measured by the Milliman 100 Pension Funding Index (PFI). An increase in the benchmark corporate bond interest rates used to value pension liabilities led to a decrease in these liabilities, representing a gain of $133 billion for the month. As of April 30, the funded ratio shot upward to 106.7%, from 103.2% at the end of March, while the funded status surplus increased to $99 billion. The last time the surplus was this close to $100 billion was in Oct 2007 (when it measured $105 billion). April marks the fifth consecutive month in which the funded ratio has improved.
The market value of assets fell by $85 billion because of April’s 4.66% investment loss, which was the largest monthly investment loss in 2022 to-date. The Milliman 100 PFI asset value decreased to $1.595 trillion as of April 30, 2022, from $1.680 trillion as of March 31, 2022. By comparison, the 2022 Milliman Pension Funding Study (PFS) 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 $133 billion during April to $1.495 trillion. The change resulted from an increase of 78 basis points in the monthly discount rate, to 4.30% for April from 3.62% in March. Discount rates have not been this high since November 2018.
Over the last 12 months (May 2021 – April 2022), the cumulative asset loss for these pensions has been 3.72% and yet, the Milliman 100 PFI funded status position has improved by $141 billion. The funded status gain is primarily the result of significant increases in discount rates over the last 12-month period. Discount rates increased by 132 basis points to 4.30% from 2.98% one year ago. The funded ratio of the Milliman 100 companies has steeply increased over the past 12 months, to 106.7% from 97.7%.
This April PFI publication reflects the annual update of the Milliman 100 companies and their 2021 financial figures included in the Milliman 2022 Pension Funding Study. The revised PFI pension obligation was $25 billion lower and the actual PFI asset value was $58 billion lower than we previously projected, after accounting for lump-sum window settlements and pension risk transfers (de-risking activities) as of year-end 2021.
The net adjustments introduced by the Milliman 2022 Pension Funding Study led to a funded status decline of $33 billion and a corresponding decrease to the funded ratio, bringing it from 99.7% to 97.9% as of December 31, 2021.
|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 4.30% 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 $120 billion (funded ratio of 108.1%) by the end of 2022 and a projected pension surplus of $151 billion (funded ratio of 110.3%) 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 4.70% by the end of 2022 and 5.30% by the end of 2023) and asset gains (9.90% annual returns), the funded ratio would climb to 116% by the end of 2022 and 132% by the end of 2023. Under a pessimistic forecast with similar interest rate and asset movements (3.90% discount rate at the end of 2022 and 3.30% by the end of 2023 and 1.90% annual returns), the funded ratio would decline to 100% 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.