Milliman analysis: Funded status
plummets in May by $65 billion
The Milliman 100 PFI funded ratio dropped to 87.9% due
to precipitous declines in discount rates and equity markets
The funded status of the 100 largest corporate defined benefit
pension plans decreased by $65 billion during May as measured
by the Milliman 100 Pension Funding Index (PFI). The deficit
widened to $210 billion from $145 billion at the end of April due
to a sharp decrease in the benchmark corporate bond interest
rates used to value pension liabilities. The funded status
deterioration was also due to investment losses, particularly in
equity markets, during May. As of May 31, the funded ratio fell
to 87.9%, down from 91.4% at the end of April. This is the third
largest monthly decline in dollars in the past five years. Only
January 2015 ($97 billion) and December 2018 ($70 billion) had
May’s negative 0.74% investment return decreased Milliman
100 PFI asset values by $15 billion to $1.521 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). The full results of the
annual 2019 study can be found at milliman.com/pfs.
The Milliman 100 PFI projected benefit obligation (PBO)
increased by $50 billion during May to $1.731 trillion. The
change resulted from a decrease of 24 basis points in the
monthly discount rate to 3.61% for May from 3.85% in April.
This is the lowest discount rate since December 2017 (3.53%).
While we don’t forecast interest rates, the gradual decrease in
rates has been quite noticeable in the financial markets in the
last few months.
|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
Over the last 12 months (June 2018–May 2019), the cumulative
asset gain for these pensions has been 3.72% and the Milliman
100 PFI funded status deficit has grown by $68 billion. The
primary reason for the worsening of the funded status deficit
has been a decline in discount rates over the past 12 months.
During that period, discount rates decreased, moving from
3.99% as of May 31, 2018, to 3.61% a year later. The funded ratio
of the Milliman 100 companies has decreased over the past 12
months to 87.9% from 91.5%.
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 3.61% 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 $175 billion (funded ratio of
89.8%) by the end of 2019 and a projected pension deficit of $113
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
3.96% by the end of 2019 and 4.56% by the end of 2020) and
asset gains (10.6% annual returns), the funded ratio would
climb to 96% by the end of 2019 and 111% by the end of 2020.
Under a pessimistic forecast with similar interest rate and asset
movements (3.26% discount rate at the end of 2019 and 2.66% by
the end of 2020 and 2.6% annual returns), the funded ratio would
decline to 84% by the end of 2019 and 77% by the end of 2020.
MILLIMAN 100 PENSION FUNDING INDEX — MAY 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.