Milliman analysis: 2016 ends almost where it started at the end of 2015
The 2016 Milliman 100 PFI funded ratio is 81.0%
Forecast for end of year 2017 and 2018
Year in review
Interest rate declines characterized 2016. This is the sixth time
since 2007 that there was an annual interest rate decline from
the prior year. The Milliman 100 discount rate fell 17 basis points
to 3.99% at the end of 2016 from 4.16% at the end of 2015. At the
end of August, the discount rate reached 3.32%, the lowest in
the 16 years of the Milliman 100 Pension Funding Index (PFI).
Since that point and coincident with the conclusion of the U.S.
presidential election, interest rates have steadily increased.
While asset returns from 2012 to 2014 were above expectations,
assets underperformed expectations during 2015 and 2016. Though
2015 posted a dismal investment gain of 1.08%, 2016 ended with a
modest gain of 6.17%. The 2016 gain still fell short of the annual
asset return expectation of 7.2%. While the year-to-date return
at the end of the third quarter of 2016 was 6.25% and it seemed
that the investment performance was on course to meet or
exceed expectations, the late year interest rate increases (based
on Federal Reserve actions) hurt the fixed income holdings of a
majority of plan sponsors and, thus, resulted in another year of
underperformance. Those plans with higher equity allocation in
2016 had better returns than plans that had lower equity allocation.
|Note: Numbers may not add up precisely due to rounding
The result was a funded status decline of $19 billion at the end of
2016 when compared to the end of 2015. The year-end 2016 funded
ratio was 81.0%, down from 81.7% at the end of 2015. While plan
assets were up $17 billion for the year, plan liabilities were up $36
billion on account of declining interest rates.
The projected asset and liability figures presented in this analysis
will be adjusted as part of Milliman’s annual Pension Funding
Study. The study will also adjust for pension settlement and
annuity purchase activities that occurred during 2016. De-risking
transactions generally result in reductions in pension funded
status because the assets paid to the participants or assumed by
the insurance companies as part of the risk transfer are larger than
the corresponding liabilities that are extinguished from the balance
sheets. To offset this decrease effect, many companies engaging in
de-risking transactions make additional cash contributions to their
pension plans to improve the plan’s funded status.
FIGURE 1: MILLIMAN 100 PENSION FUNDING INDEX PENSION SURPLUS/DEFICIT
FIGURE 2: MILLIMAN 100 PENSION FUNDING INDEX — PENSION FUNDED RATIO
During 2016, the cumulative investment gain was 6.17% while the
cumulative liability loss (i.e., the projected benefit obligation
(PBO) increase) was 5.88%. The $19 billion funded status
improvement during 2016 resulted in a year-end funded status
deficit of $326 billion. Pension expense for 2017 for all Milliman
100 companies is estimated to increase by a modest $0.6 billion.
The year 2016 got off to a poor start as the investment loss for
the Milliman 100 plans was (1.58)% in January 2016, resulting
in a funded ratio of 79.9%. The activity during the remainder
of the first quarter of 2016 was characterized by strong asset
performance coupled with rising pension liabilities due to interest
rate declines. The resulting funded ratio was 78.1% as of March
31, 2016. The second quarter of 2016 brought on further funded
status declines as interest rates continued to fall. The funded ratio
reached its nadir—75.6%—for the year at the end of June 2016.
From there, the funded ratio oscillated about this value for the
next three months, eventually breaking through to 76.3% at the
end of September. This improvement was the result of an interest
rate gain in September. The interest rate increases continued for
the rest of the fourth quarter, and the funded ratio ended the year
at 81.0%. While the first half of the year saw declines, the second
half of 2016 was characterized by gains almost bringing the funded
ratio full circle to the beginning of the year.
The present interest rate momentum could continue into 2017.
Rumors of potential multiple rate hikes by the Federal Reserve
in 2017 have plan sponsors and pension practitioners closely
watching market activity. If interest rates continue their upward
trajectory during 2017, the funded ratio could make some major
gains. More information on this is provided in the 2017-2018
projections discussion below.
Pension plan accounting information disclosed in the footnotes of
the Milliman 100 companies’ annual reports for the 2016 fiscal year
is expected to be available during the first quarter of 2017 as part
of the 2017 Milliman Pension Funding Study.
The funded status improved by $13 billion during December. The
deficit fell to $326 billion from a deficit of $339 billion at the end
of November. The funded status improvement for the month of
December was due to robust investment returns of 1.17%. Corporate
bond interest rates that are the benchmarks used to value pension
liabilities were flat during December. As of December 31, the
funded ratio improved to 81.0% from 80.3% at the end of November.
December’s $11 billion increase in market value brings the
Milliman 100 PFI asset value to $1.392 trillion at year-end 2016.
The Milliman 100 PFI liability value decreased to $1.718 trillion
at the end of December. The liability change resulted from a
one basis point increase in the monthly discount rate to 3.99%
for December from 3.98% for November.
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 3.99% were maintained
during years 2017 and 2018, we forecast the funded status of the
surveyed plans would increase. This would result in a projected
pension deficit of $294 billion (funded ratio of 82.9%) by the end
of 2017 and a projected pension deficit of $258 billion (funded
ratio of 85.1%) by the end of 2018. For purposes of this forecast,
we have assumed 2017 aggregate contributions of $33 billion and
2018 aggregate contributions of $36 billion.
Under an optimistic forecast with rising interest rates (reaching
4.59% by the end of 2017 and 5.19% by the end of 2018) and
asset gains (11.2% annual returns), the funded ratio would
climb to 93% by the end of 2017 and 106% by the end of 2018.
Under a pessimistic forecast with similar interest rate and asset
movements (3.39% discount rate at the end of 2017 and 2.79% by
the end of 2018 and 3.2% annual returns), the funded ratio would
decline to 74% by the end of 2017 and 68% by the end of 2018.
MILLIMAN 100 PENSION FUNDING INDEX — NOVEMBER 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