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Pension Funding Index

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Milliman analysis: Corporate pension funded status drops by $8 billion in November

Strong investment gain of $18 billion offset by liability increases of $26 billion; déjà vu as pension funded status experiences a second consecutive $8 billion monthly loss. All eyes on Fed policy and the bond market as the December 31 measurement date nears. Rates are down 79 basis points this year—can they go any lower?

The funded status of the 100 largest corporate defined benefit pension plans fell by $8 billion during November as measured by the Milliman 100 Pension Funding Index (PFI). The deficit widened to $271 billion from $263 billion at the end of October, primarily due to another decrease in the benchmark corporate bond interest rates used to value pension liabilities. As of November 30, the funded ratio declined to 84.6%, from 84.8% at the end of October.

The projected benefit obligation (PBO), or pension liabilities, increased by $26 billion during November, raising the Milliman 100 PFI value to $1.756 trillion. The PBO change resulted from a decrease of 11 basis points in the monthly discount rate to 3.89% for November, from 4.00% for October. Discount rate declines continue to be the lead story for 2014 as rates have dropped by 79 basis points so far from year-end 2013. Year to date, pension liabilities have increased by 14.4% or $167 billion, resulting in a decline in the Milliman 100 PFI funded ratio.

The market value of assets improved by $18 billion as a result of November’s investment gain of 1.49%. The Milliman 100 PFI asset value increased to $1.485 trillion. 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 ( December 2013–November 2014), the cumulative investment gain for these pensions has been 10.26% but the Milliman 100 PFI funded status deficit has worsened by $74 billion. The drop in funded status over the past 12 months is due to the decline in interest rates as the investment gain has exceeded expectations. Since November 30, 2013, the discount rate has dropped 89 basis points to 3.89% from 4.78%. The funded ratio of the Milliman 100 companies has decreased over the past 12 months to 84.6% from 87.6%.

December 31 pension disclosures are expected to also reflect adoption by many plan sponsors of new mortality assumptions that 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 December 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, our preliminary analysis of the impact of the new mortality tables indicates an estimated increase of 6% to 8% in pension liabilities. This would imply a PBO increase of up to $141 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 that occurred during 2014 will be reflected. De-risking transactions generally result in reductions in pension funded status since the assets released as part of the risk transfer are larger than the corresponding liabilities that are coming off of balance sheets. To offset this decrease effect, many companies engaging in de-risking transactions make additional contributions to their pension plans to shore up funded status.

2014-2016 Projections

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 3.89% were maintained during years 2014 through 2016, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $230 billion (funded ratio of 87.0%) by the end of 2015 and a projected pension deficit of $191 billion (funded ratio of 89.2%) by the end of 2016. For purposes of this forecast, we have assumed 2014 aggregate contributions of $44 billion and 2015 and 2016 aggregate contributions of $31 billion.

Under an optimistic forecast with rising interest rates (reaching 4.54% by the end of 2015 and 5.14% by the end of 2016) and asset gains (11.4% annual returns), the funded ratio would climb to 98% by the end of 2015 and 112% by the end of 2016. Under a pessimistic forecast with similar interest rate and asset movements (3.24% discount rate at the end of 2015 and 2.64% by the end of 2016 and 3.4% annual returns), the funded ratio would decline to 77% by the end of 2015 and 70% by the end of 2016.

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.