Milliman analysis: Corporate pension funded status drops by $8 billion in October
Strong investment gain of $14 billion offset by liability increases of $22 billion
The funded status of the 100 largest corporate defined benefit
pension plans fell by $8 billion during October as measured by the
Milliman 100 Pension Funding Index (PFI). The deficit widened to
$263 billion from $255 billion at the end of September, primarily
due to a decrease in the benchmark corporate bond interest rates
used to value pension liabilities. As of October 31, the funded ratio
declined to 84.8%, from 85.1% at the end of September.
The projected benefit obligation (PBO), or pension liabilities,
increased by $22 billion during October, raising the Milliman
100 PFI value to $1.731 trillion from $1.709 trillion at the end of
September. The PBO change resulted from a decrease of 10 basis
points in the monthly discount rate to 4.00% for October, from
4.10% for September. Discount rate declines continue to be the lead
story for 2014 as they have dropped by 68 basis points so far from
year-end 2013. Year-to-date, the pension liabilities have increased by
$141 billion, resulting in a decline in the Milliman 100 PFI funded ratio.
The market value of assets improved by $14 billion as a result of
October’s investment gain of 1.25%. The Milliman 100 PFI asset
value increased to $1.468 trillion, up from $1.454 trillion at the end
of September. By comparison, the 2014 Milliman Pension Funding
Study reported that the monthly median expected investment return
during 2013 was 0.60% (7.4% annualized).
Over the last 12 months ( November 2013 – October 2014), the
cumulative asset return for these pensions has been 9.59% but the
Milliman 100 PFI funded status deficit has worsened by $41 billion.
The drop in funded status over the past 12 months is primarily
due to the decline in interest rates. Since October 31, 2013, the
discount rate has dropped 67 basis points to 4.00% from 4.67%.
The funded ratio of the Milliman 100 companies has decreased over
the past 12 months to 84.8% from 86.3%.
All eyes will be on Fed policy as it relates to interest rates as the
December 31st measurement date nears. In addition, December 31
pension disclosures are expected to also reflect adoption by many
plan sponsors of new mortality assumptions which generally capture
further improvements in life expectancy and will result in higher pension
liabilities, the magnitude of which would depend on the age, gender,
and composition of annuitants and non-annuitants by individual plan.
The November Milliman 100 PFI has not been adjusted to estimate the
impact of possibly moving to the mortality tables recently finalized by
the Society of Actuaries. However, based on our preliminary analysis
of the impact of the new mortality tables, we estimate an increase of
6% to 8% in pension liabilities. This would imply a PBO increase of
up to $139 billion and would decrease the funded ratio by over six
percentage points, bringing it below 79%.
Furthermore, the projected asset and liability figures presented in this
analysis will be adjusted as part of our annual 2015 Pension Funding
Study where pension settlement and annuity purchase activities will be
reflected. The November Milliman 100 PFI does not reflect the recently
executed mammoth pension de-risking transactions involving Motorola
and Bristol-Myers Squibb, two of the companies that comprise the
Milliman 100 cohort. While they reduce liability, pension de-risking
transactions also generally result in a reduction in funded status
due to the correspondingly larger asset reductions. However, many
companies engaging in de-risking transactions make an additional
contribution to their pension plans to shore up funded status.
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 4.00% were maintained during years 2014 and 2015, we
forecast the funded status of the surveyed plans would increase.
This would result in a projected pension deficit of $255 billion
(funded ratio of 85.3%) by the end of 2014 and a projected pension
deficit of $219 billion (funded ratio of 87.4%) 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
4.10% by the end of 2014 and 4.70% by the end of 2015) and
asset gains (11.4% annual returns), the funded ratio would climb
to 87% by the end of 2014 and 99% by the end of 2015. Under a
pessimistic forecast with similar interest rate and asset movements
(3.90% discount rate at the end of 2014 and 3.30% 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.