London Market Monitor – 31 August 2022
Our August review of the markets and Solvency II discount rates.
Strong investment returns drive Milliman 100 PFI funded ratio to 98.1%
The funded status of the 100 largest corporate defined benefit pension plans moved closer to “fully funded” this October, increasing by $17 billion as measured by the Milliman 100 Pension Funding Index (PFI). The deficit declined to $36 billion primarily due to robust investment gains for the month. As the PFI approaches “full funding” the index’s funded status deficit will approach zero, which can be seen by the string of only double-digit monthly reported deficits over 2021, the lowest being $23 billion at the end of May.
Offsetting October’s funded status gain were pension liabilities that increased due to declines in the benchmark corporate bond interest rates used to value those pension liabilities. As of October 31, the funded ratio climbed to 98.1%, increasing from 97.2% reported at the end of September.
The market value of assets grew by $31 billion as a result of October’s 2.10% investment gain. This was the second largest monthly investment increase during 2021 next to the 2.39% investment gain in April. The Milliman 100 PFI asset value increased to $1.839 trillion at the end of October. 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.
|MV||PBO||FUNDED STATUS||FUNDED PERCENTAGE|
Note: Numbers may not add up precisely due to rounding
The projected benefit obligation increased to $1.874 trillion. The change resulted from a decrease of six basis points in the monthly discount rate, to 2.72% for October from 2.78% in September. Discount rates have only been above 3.00% once over the past 12 months.
Over the last 12 months (November 2020 to October 2021), the cumulative asset return for these pensions has been 15.55% and the Milliman 100 PFI funded status deficit has improved by $213 billion. Discount rates have shown a net increase of one basis point from 2.71% as of October 31, 2020, to 2.72% a year later. The funded ratio of the Milliman 100 companies has improved to 98.1% from 87.0% during this time. We will continue to closely monitor the movement of the financial markets and the interest rate environment as year-end approaches.
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 2.72% 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 $26 billion (funded ratio of 98.6%) by the end of 2021 and a projected pension surplus of $36 billion (funded ratio of 101.9%) 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 2.82% by the end of 2021 and 3.42% by the end of 2022) and asset gains (10.2% annual returns), the funded ratio would climb to 101% by the end of 2021 and 117% by the end of 2022. Under a pessimistic forecast with similar interest rate and asset movements (2.62% discount rate at the end of 2021 and 2.02% by the end of 2022 and 2.2% annual returns), the funded ratio would decline to 97% by the end of 2021 and 88% 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.