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Pension Funding Index

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Milliman analysis: Funded status improves by $31 billion in May

The Milliman 100 PFI funded status deficit decreases to $280 billion.

The funded status of the 100 largest corporate defined benefit pension plans increased by $31 billion during May as measured by the Milliman 100 Pension Funding Index (PFI). The funded status deficit fell to $280 billion at the end of May, primarily due to an increase in the benchmark corporate bond interest rates used to value pension liabilities. Flat investment performance partially offset the May liability decrease. This was quite similar to April’s activity, where funded status improved by $40 billion. The second quarter of 2015 is off to a great start compared with the first quarter’s deficit increase of $21 billion. As of May 31, the funded ratio rose to 84.1%, up from 82.6% at the end of April.

The projected benefit obligation (PBO), or pension liabilities, decreased by $34 billion during May, lowering the Milliman 100 PFI value to $1.756 trillion. The change resulted from an increase of 15 basis points in the monthly discount rate to 3.97% for May, from 3.82% for April. Even with the increases of the last two months, discount rates of under 4.00% have now persisted for seven consecutive months.

May’s flat investment performance, a modest gain of 0.15%, led to a $3 billion decrease in Milliman 100 PFI asset value. By comparison, the 2015 Milliman Pension Funding Study reported that the monthly median expected investment return during 2014 was 0.59% (7.3% annualized).

Over the last 12 months (June 2014 to May 2015), the cumulative asset return for these pensions has been 7.91% and the Milliman 100 PFI funded status deficit has improved by $2 billion.

The discount rate as of a year ago on May 31, 2014, was 4.06%, nine basis points higher than where it stands a year later as of May 31, 2015. The funded ratio of the Milliman 100 companies has increased over the past 12 months to 84.1% from 83.6% primarily due to investment returns slightly ahead of expectations.

2015-2016 Projections

If the Milliman 100 PFI companies were to achieve the expected 7.3% (as per the 2015 pension funding study) median asset return for their pension plan portfolios and the current discount rate of 3.97% were maintained during years 2015 and 2016, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $258 billion (funded ratio of 85.3%) by the end of 2015 and a projected pension deficit of $218 billion (funded ratio of 87.7%) by the end of 2016. For purposes of this forecast, we have assumed 2015 aggregate contributions of $32 billion and 2016 aggregate contributions of $36 billion.

Under an optimistic forecast with rising interest rates (reaching 4.32% by the end of 2015 and 4.92% by the end of 2016) and asset gains (11.3% annual returns), the funded ratio would climb to 91% by the end of 2015 and 105% by the end of 2016. Under a pessimistic forecast with similar interest rate and asset movements (3.62% discount rate at the end of 2015 and 3.02% by the end of 2016 and 3.3% annual returns), the funded ratio would decline to 80% by the end of 2015 and 72% by the end of 2016.

About the Milliman 100 Monthly Pension Funding Index

For the past 15 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 2014 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2015 Pension Funding Study, which was published on April 2, 2015. 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.