Milliman analysis: Corporate pension funded status improves
by $26 billion in September, the best month of 2014 so far
Pension assets incur loss of $19 billion while interest rates climb above 4%, dropping liabilities by $45 billion
The funded status of the 100 largest corporate defined benefit
pension plans improved by $26 billion during September as
measured by the Milliman 100 Pension Funding Index (PFI).
The deficit dropped to $253 billion from $279 billion at the end
of August, primarily due to an increase in the benchmark corporate
bond interest rates used to value pension liabilities. The funded
status would have improved further were it not for September’s
investment losses. As of September 30, the funded ratio rose to
85.2%, up from 84.1% at the end of August.
The projected benefit obligation (PBO), or pension liabilities,
decreased by $45 billion during September, lowering the Milliman
100 PFI value to $1.709 trillion from $1.754 trillion at the end of
August. The PBO change resulted from an increase of 21 basis points
in the monthly discount rate to 4.10% for September, from 3.89%
for August. Coincidentally, the discount rate dropped by 21 basis
points during August, producing a corresponding PBO increase of
$46 billion. Year-to-date, the pension liabilities are up by $119 billion,
resulting in a decline in the Milliman 100 PFI funded ratio.
The market value of assets declined by $19 billion as a result of
September’s investment loss of -1.03%. The Milliman 100 PFI asset
value decreased to $1.456 trillion, down from $1.475 trillion at the
end of August. By comparison, the 2014 Milliman Pension Funding
Study reported that the monthly median expected investment return
during 2013 was 0.60% (7.4% annualized).
The market value of assets increased by $24 billion as a result of
August’s investment gain of 1.92%. The Milliman 100 PFI asset value
increased to $1.473 trillion, up from $1.449 trillion at the end of July.
By comparison, the 2014 Milliman Pension Funding Study reported
that the monthly median expected investment return during 2013
was 0.60% (7.4% annualized).
Third quarter 2014 summary
During the quarter ended September 30, 2014, the funded status
deficit increased by $1 billion. This was primarily due to the strong
investment gains in August, which essentially offset the investment
losses during July and September. The asset gain in the third quarter
was almost flat at 0.64%. Interest rates inched upward by two basis
points during the third quarter of 2014. The funded ratio of the
Milliman 100 companies dropped slightly to 85.2% at the end of
September from 85.3% at the end of June.
So far during 2014, the funded status has declined in each of the
three quarters. Prior to 2014, the Milliman 100 PFI experienced
five straight quarters of funded status improvement. Meanwhile,
September 2014 turned out to be the best month so far, with the
funded status recording its largest improvement of the year. It
remains to be seen whether September’s positive momentum will
continue or whether another down quarter will close out the year.
Over the last 12 months ( October 2013 to September 2014), the
cumulative asset return for these pensions has been 10.9%, but the
Milliman 100 PFI funded status deficit has worsened by $40 billion.
The drop in funded status over the past 12 months is primarily due
to the decline in interest rates. Since September 30, 2013, the
discount rate has dropped 70 basis points, to 4.10% from 4.80%.
The funded ratio of the Milliman 100 companies has decreased over
the past 12 months to 85.2% from 86.5%.
If the Milliman 100 PFI companies were to achieve the expected
7.4% (as per the 2014 Milliman Pension Funding Study) median
asset return for their pension plan portfolios and the current discount
rate of 4.10% were maintained during 2014 and 2015, we forecast
that the funded status of the surveyed plans would increase. This
would result in a projected pension deficit of $241 billion (funded
ratio of 85.9%) by the end of 2014 and a projected pension deficit
of $206 billion (funded ratio of 88.0%) by the end of 2015. For
purposes of this forecast, we have assumed 2014 aggregate
contributions of $44 billion and 2015 aggregate contributions
of $31 billion. The drop in contribution expectations for 2015 is
reflective of the passage of the Highway and Transportation Funding
Act of 2014 (HATFA), which was signed into law on August 8 and
extended the MAP-21 interest rate relief provisions for defined
benefit plan sponsors. While we expect many of the Milliman 100
companies to make contributions above the minimum requirements,
we also expect some plan sponsors who are cash strapped to take
advantage of the available contribution relief.
Under an optimistic forecast with rising interest rates (reaching
4.25% by the end of 2014 and 4.85% by the end of 2015) and
asset gains (11.4% annual returns), the funded ratio would climb to
88% by the end of 2014 and 101% by the end of 2015. Under a
pessimistic forecast with similar interest rate and asset movements
(3.95% discount rate at the end of 2014 and 3.35% by the end of
2015 and 3.4% annual returns), the funded ratio would decline to
84% by the end of 2014 and 76% by the end of 2015.
About the Milliman 100 Monthly Pension Funding Index
For the past 14 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 2013 fiscal year and for previous fiscal years. This pension plan accounting disclosure
information was summarized as part of the Milliman 2014 Pension Funding Study, which was published on April 2, 2014. 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.