Year in review
The funded status of the country’s 100 largest corporate pension plans, as measured by the Milliman 100 Pension Funding Index (PFI), experienced a modest improvement in 2023, driven by annual investment returns of 9.94%. Declining discount rates, particularly in the fourth quarter, and the corresponding liability (i.e., the projected benefit obligation) increase of 8.33% served to partially offset the asset gains, resulting in a funded status improvement of $4 billion for the year. This gain paled in comparison to 2022’s $63 billion funded status improvement, which was primarily driven by significant rises in discount rates that more than offset market declines.
In 2023, corporate pension plan assets rebounded as equity markets, led by the technology sector, posted strong returns. Discount rates experienced several ups and downs in 2023 before finally settling at 5.00%, 22 basis points (bps) lower than at the start of the year. For reference, the discount rate at the end of October 2023 of 6.20% was the highest in nearly 15 years. However, November and December saw a combined discount rate decline of 120 bps, ending the year at 5.00%.
Assets outperformed expectations during 2023, as the plans posted a cumulative annual return of 9.94%. The monthly expected investment return during 2022 was 0.47% (5.8% annualized), as reported in our 2023 Milliman Corporate Pension Funding Study (PFS). Investment returns have been above PFS expectations in seven of the last 10 years.
Overall, the year-end 2023 funded ratio inched up to 102.1% from 101.9% at the end of 2022. While plan liabilities increased $15 billion due to the discount rate decreases, plan assets rose by $19 billion. The resulting $4 billion funded status gain during 2023 lifted the year-end funded status surplus to $29 billion.
The projected asset and liability figures presented in this analysis will be adjusted as part of Milliman’s annual 2024 PFS, which will analyze the most recent plan sponsor financial statements filed with the U.S. Securities and Exchange Commission. The 2024 PFS will also reflect reported pension settlement and annuity purchase activities that occurred during 2023. De-risking transactions generally result in reductions in pension funded status since the assets paid to the participants or assumed by the insurance companies as part of the risk transfer are typically larger than the corresponding liabilities that are extinguished from the balance sheets. To offset this decrease, many companies engaging in de-risking transactions make additional cash contributions to their pension plans to improve the plan’s funded status.
Highlights
| $ BILLION | FUNDED PERCENTAGE | |||
|---|---|---|---|---|
| MV | PBO | FUNDED STATUS | ||
| November | 1,306 | 1,261 | 45 | 103.6% |
| December | 1,366 | 1,337 | 29 | 102.1% |
| Monthly change | +60 | +77 | (17) | -1.5% |
| YTD Change | +19 | +15 | +4 | 0.2% |
Note: Numbers may not add up precisely due to rounding
Quarterly review
Corporate pensions saw oscillating funded ratios throughout 2023:
- In the first quarter of 2023, discount rates fell 22 bps to 5.00%, causing plan liabilities to rise. The market value of plan assets barely kept pace, posting year-to-date investment returns of 4.34%. This resulted in a drop in the funded ratio to 100.1% from 101.9% and the funding surplus falling below $1 billion.
- The second quarter of 2023 saw the largest funding improvement of the year as plan liabilities declined due to rising discount rates while asset returns remained flat. The funded ratio improved to 102.5% as of June 30, with the funding surplus climbing to $33 billion.
- The funded status surplus increased another $12 billion during the third quarter, boosted again by liability reductions due to rising discount rates that reached 5.84% at the quarter’s end. While July offered a modest investment return of 0.81%, the subsequent two months posted heavy losses. Despite these asset losses, the funded ratio rose to 103.6% as of September 30.
- The fourth quarter of 2023 boasted strong investment returns of 9.23%. However, discount rates fell from their peak, plummeting 84 bps for the quarter and landing at 5.00% by the end of the year. The Milliman 100 PFI funded ratio dropped to 102.1% as of December 31, approximately 0.2% ahead of where it started 12 months before.
Pension plan accounting information disclosed in the footnotes of the Milliman 100 companies’ annual reports for the 2023 fiscal year is expected to be available during the first quarter of 2024 and will be published, along with our comprehensive recap, in April as part of the 2024 Milliman PFS.
Figure 1: Milliman 100 Pension Funding Index — Pension surplus/deficit
Figure 2: Milliman 100 Pension Funding Index — Pension funded ratio
2024-2025 projections
If the Milliman 100 PFI companies were to achieve the expected 5.8% median asset return (as per the 2023 PFS), and if the current discount rate of 5.00% remains unchanged throughout 2024 and 2025, we forecast that the funded status of the surveyed plans would increase. The pension surplus is projected to be $49 billion (funded ratio of 103.7%) by the end of 2024 and $70 billion (funded ratio of 105.3%) by the end of 2025. For purposes of this forecast, we have assumed 2024 and 2025 aggregate annual contributions of $25 billion.
Under an optimistic forecast with rising interest rates (reaching 5.60% by the end of 2024 and 6.20% by the end of 2025) and annual asset returns of 9.8%, the funded ratio is projected to climb to 115% by the end of 2024 and 130% by the end of 2025. Under a pessimistic forecast with similar interest rate and asset movements (4.40% discount rate at the end of 2024 and 3.80% by the end of 2025 and 1.8% annual asset returns), the funded ratio is projected to decline to 93% by the end of 2024 and 84% by the end of 2025.
Milliman 100 Pension Funding Index - January 2024 (all dollar amounts in millions)
Pension asset and liability returns
About the Milliman 100 monthly Pension Funding Index
For the past 23 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 2022 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2023 Pension Funding Study, which was published on April 20, 2023. 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.