Milliman analysis: Funded status
shows small improvement in June
The Milliman 100 PFI funded ratio increased to 88.0%
in spite of discount rate lows not seen in the past three years
The funded status of the 100 largest corporate defined benefit
pension plans increased by $1 billion during June as measured
by the Milliman 100 Pension Funding Index (PFI). The deficit
changed to $212 billion from $213 billion at the end of May
primarily due to robust asset gains in June. Offsetting the asset
gains were rising pension liabilities, the result of a decrease
in the benchmark corporate bond interest rates used to value
those liabilities. As of June 30, the funded ratio inched upward
to 88.0%, from 87.7% at the end of May. The current funded
ratio at mid-year trails the funded ratio of 89.4% seen at the
start of 2019.
June’s solid 2.82% investment gain raised the Milliman 100 PFI
asset value by $38 billion to $1.556 trillion, up from $1.518 trillion
at the end of May. By comparison, the 2019 Milliman Pension
Funding Study reported that the monthly median expected
investment return during 2018 was 0.53% (6.6% annualized).
June’s asset returns more than made up for investment losses
experienced in May and continues the upward march of asset
gains seen during most of 2019.
On the liability side of the equation, the PFI projected benefit
obligation (PBO) increased by nearly the same dollar amount as
the asset gain in June. Plan liabilities rose by $37 billion for the
month, increasing the Milliman 100 PFI value to $1.768 trillion.
The change resulted from a decrease of 16 basis points in the
monthly discount rate, to 3.45% in June from 3.61% in May.
June’s discount rate is the lowest observed since the end of
September 2016, when the rate was 3.42% and the funded status
deficit was over $400 billion.
|Note: Numbers may not add up precisely due to rounding
FIGURE 1: MILLIMAN 100 PENSION FUNDING INDEX PENSION SURPLUS/DEFICIT
FIGURE 2: MILLIMAN 100 PENSION FUNDING INDEX — PENSION FUNDED RATIO
Second Quarter 2019 Summary
For the quarter ending June 30, 2019, assets increased by
$33 billion and plan liabilities increased by $70 billion. While
investment returns exceeded expectations during the second
quarter, discount rates – which fell by 33 basis points – had a
stronger impact on funded status. The net result was a funded
status loss of $37 billion. The funded status deficit grew to
$212 billion by the end of the second quarter. The funded ratio
of the Milliman 100 companies decreased to 88.0% at the end
of June from 89.7% at the end of March.
Over the last 12 months (July 2018 – June 2019), the cumulative
asset return for these pensions has been 6.67%, but the Milliman
100 PFI funded status deficit has worsened by $89 billion. The
primary reason for the deterioration in the funded status deficit
is discount rate declines over the past 12 months. Discount rates
have fallen precipitously from 4.12% as of June 30, 2018 to 3.45%
a year later. The funded ratio of the Milliman 100 companies has
decreased over the past 12 months to 88.0% from 92.5%.
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 3.45% 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 $180 billion (funded
ratio of 89.8%) by the end of 2019 and a projected pension
deficit of $115 billion (funded ratio of 93.4%) 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
3.75% by the end of 2019 and 4.35% by the end of 2020) and
asset gains (10.6% annual returns), the funded ratio would
climb to 95% by the end of 2019 and 111% by the end of 2020.
Under a pessimistic forecast with similar interest rate and
asset movements (3.15% discount rate at the end of 2019 and
2.55% by the end of 2020 and 2.6% annual returns), the funded
ratio would decline to 85% by the end of 2019 and 78% by the
end of 2020.
MILLIMAN 100 PENSION FUNDING INDEX — JUNE 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.