Milliman Analysis: Corporate pension funded status improved by $19 billion in September
Pension funded status has declined by $130 billion this year
The funded status of the 100 largest
corporate defined benefit pension
plans improved by $19 billion during
September as measured by the Milliman
100 Pension Funding Index (PFI). The deficit fell to $437 billion due to interest rate gains during September. As of September 30, the funded ratio increased to 76.3%, up from 75.6% at the end of August.
|Note: Numbers may not add up precisely due to rounding
The market value of assets fell by $4 billion as a result of September’s flat investment return of 0.07%. The Milliman 100 PFI asset value decreased to $1.410 trillion at the end of September. By comparison, the 2016 Milliman Pension Funding Study reported that the monthly median expected investment return during 2015 was 0.58% (7.2% annualized).
The projected benefit obligation (PBO), or pension liabilities, decreased to $1.848 trillion at the end of September from
$1.871 trillion at the end of August. The change resulted from an increase of 10 basis points in the monthly discount rate to 3.42% for September from 3.32% for August. Discount rates had reached a record low in August and this improvement helped to boost funded status.
Third Quarter 2016 Summary
During the quarter ended September 30, 2016, the funded status deficit improved by $11 billion. This was primarily due to the September funded status gain. The funded status worsened in July and August due to discount rate declines, but September reversed the trend resulting in the third quarter net improvement. The asset gains in the third quarter were at 2.53% as strong performance for the quarter helped to offset liability losses due to discount rate declines. Overall, discount rates fell by three basis points for the Milliman 100 PFI during the third quarter of 2016. The funded ratio of the Milliman 100 companies rose to 76.3% at the end of September from 75.6% at the end of June.
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 (October 2015 – September 2016), the cumulative asset return for these pensions has been 8.47%; however, the Milliman 100 PFI funded status deficit has deteriorated by $117 billion. The rise in the funded status deficit over the past 12 months is primarily due to decreases in discount rates, on the order of 77 basis points. The funded ratio of the Milliman 100 companies has decreased over the past
12 months to 76.3% from 81.1%. Getting back to the 80% funded level before the end of the year requires a 3.7% improvement and remains a significant hurdle for the Milliman 100 plans in aggregate as the funded status deficit has risen by $130 billion so far in 2016.
If the Milliman 100 PFI companies were to achieve the expected 7.2% median asset return (as per the 2016 pension funding study), and if the current discount rate of 3.42% were maintained during years 2016 and 2017, we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $429 billion (funded ratio of 76.8%) by the end of 2016 and a projected pension deficit of $394 billion (funded ratio of 78.7%) by the end of 2017. For purposes of this forecast, we have assumed 2016 aggregate contributions of $33 billion and 2017 aggregate contributions of $36 billion.
Under an optimistic forecast with rising interest rates (reaching 3.57% by the end of 2016 and 4.17% by the end of 2017) and asset gains (11.2% annual returns), the funded ratio would climb to 79% by the end of 2016 and 91% by the end of 2017. Under a pessimistic forecast with similar interest rate and asset movements (3.27% discount rate at the end of 2016 and 2.67% by the end of 2017 and 3.2% annual returns), the funded ratio would decline to 75% by the end of 2016 and 68% by the end of 2017.
MILLIMAN 100 PENSION FUNDING INDEX — SEPTEMBER 2016 (ALL DOLLAR AMOUNTS IN MILLIONS)
PENSION ASSET AND LIABILITY RETURNS
About the Milliman 100 Monthly Pension Funding Index
For the past 16 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 2015 fiscal year and for previous fiscal years. This pension
plan accounting disclosure information was summarized
as part of the Milliman 2016 Pension Funding Study, which
was published on April 6, 2016. 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