Milliman analysis: All-time low discount rate in August
increases funded status deficit by $87 billion
The Milliman 100 PFI funded ratio decreases to 83.8%
The funded status deficit of the 100 largest corporate defined
benefit pension plans increased by $87 billion during August as
measured by the Milliman 100 Pension Funding Index (PFI). The
funded status deficit ballooned to $306 billion from $219 billion
at the end of July due to a decrease in the benchmark corporate
bond interest rates used to value pension liabilities. The funded
status decline was partially offset by strong investment returns
particularly due to fixed income asset holdings during August.
As of August 31, the funded ratio fell to 83.8%, down from 87.7%
at the end of July.
The projected benefit obligation (PBO) increased by a
whopping $104 billion during August, raising the Milliman 100
PFI liability value to $1.887 trillion from $1.783 trillion at the end
of July. Liabilities grew thanks to a decrease of 42 basis points
in the monthly discount rate to 2.95% for August, from 3.37% in
July. August’s discount rate is the lowest discount recorded in
the 19-year history of the Milliman 100 PFI. The Milliman 100
PFI has never previously reported a discount rate below 3.00%.
|Note: Numbers may not add up precisely due to rounding
A monthly increase of at least $100 billion in the PBO is the
first since a $117 billion increase for January 2015.
August’s 1.33% investment return raised the Milliman 100
PFI asset value by $17 billion to $1.581 trillion. By comparison,
the 2019 Milliman Pension Funding Study reported that the
monthly median expected investment return during 2018 was
0.53% (6.6% annualized).
FIGURE 1: MILLIMAN 100 PENSION FUNDING INDEX PENSION SURPLUS/DEFICIT
FIGURE 2: MILLIMAN 100 PENSION FUNDING INDEX — PENSION FUNDED RATIO
Over the last 12 months (September 2018 – August 2019), the
cumulative asset return for these pensions has been 6.76% but
the Milliman 100 PFI funded status deficit has worsened by
$192 billion. Discount rates have fallen by 110 basis points over
the last 12 months moving from 4.05% as of August 31, 2018
to 2.95% a year later. The funded ratio of the Milliman 100
companies has plummeted over the past 12 months to 83.8%
If the Milliman 100 PFI companies were to achieve the
expected 6.6% median asset return (as per the 2019 pension
funding study), and if the current discount rate of 2.95% were
maintained during years 2019 through 2020, we forecast that the
funded status of the surveyed plans would increase. This would
result in a projected pension deficit of $283 billion (funded
ratio of 84.9%) by the end of 2019 and a projected pension
deficit of $215 billion (funded ratio of 88.5%) by the end of 2020.
For purposes of this forecast, we have assumed 2019 and 2020
aggregate annual contributions of $50 billion.
Under an optimistic forecast with rising interest rates
(reaching 3.15% by the end of 2019 and 3.75% by the end of
2020) and asset gains (10.6% annual returns), the funded ratio
would climb to 88% by the end of 2019 and 103% by the end of
2020. Under a pessimistic forecast with similar interest rate
and asset movements (2.75% discount rate at the end of 2019
and 2.15% by the end of 2020 and 2.6% annual returns), the
funded ratio would decline to 82% by the end of 2019 and 75%
by the end of 2020.
MILLIMAN 100 PENSION FUNDING INDEX — AUGUST 2019 (ALL DOLLAR AMOUNTS IN MILLIONS)
PENSION ASSET AND LIABILITY RETURNS
About the Milliman 100 Monthly Pension Funding Index
For the past 19 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 2018 fiscal year and for previous fiscal years. This pension
plan accounting disclosure information was summarized as
part of the Milliman 2019 Pension Funding Study, which was
published on April 16, 2019. 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.