Milliman analysis: Funded status deficit grew to $306 billion at end of May
The Milliman 100 PFI funded ratio decreased to 84.0% as discount rates once again neared all-time lows
The funded status of the 100 largest corporate defined benefit pension plans worsened by $17 billion during May as measured by the Milliman 100 Pension Funding Index (PFI). The deficit swelled to $306 billion from $289 billion at the end of April due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. The funded status deterioration was partially offset by strong investment gains during May. This is the second consecutive month where discount rate decreases have countered the strong investment returns of the Milliman 100 companies. As of May 31, the funded ratio fell to 84.0%, down from 84.5% at the end of April. May’s robust 1.85% investment gain increased Milliman 100 PFI asset values by $24 billion to $1.605 trillion at the end of May. By comparison, the 2020 Milliman Pension Funding Study (PFS) reported that the monthly median expected investment return during 2019 was 0.53% (6.5% annualized). The full results of the annual 2020 study can be found at www.milliman.com/pfs.
Highlights
| $ BILLION | ||||
| MV | PBO | FUNDED STATUS | FUNDED PERCENTAGE | |
|---|---|---|---|---|
| APRIL | 1,581 | 1,870 | (289) | 84.5% |
| MAY | 1,605 | 1,911 | (306) | 84.0% |
| MONTHLY CHANGE | +24 | +41 | (17) | -0.5% |
| YTD CHANGE | (18) | +105 | (123) | -5.8% |
Note: Numbers may not add up precisely due to rounding
The Milliman 100 PFI projected benefit obligation (PBO) increased by $41 billion during May to $1.911 trillion. The change resulted from a decrease of 16 basis points in the monthly discount rate, to 2.76% for May from 2.92% in April.
Over the last 12 months (June 2019 – May 2020), the cumulative asset gain for these pensions has been 9.11%, yet the Milliman 100 PFI funded status deficit has grown by $100 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 3.61% as of May 31, 2019, to 2.76% a year later. The funded ratio of the Milliman 100 companies has decreased significantly over the past 12 months to 84.0% from 88.0%.
FIGURE 1: MILLIMAN 100 PENSION FUNDING INDEX PENSION SURPLUS/DEFICIT
FIGURE 2: MILLIMAN 100 PENSION FUNDING INDEX — PENSION FUNDED RATIO
2020-2021 Projections
If the Milliman 100 PFI companies were to achieve the expected 6.5% median asset return (as per the 2020 pension funding study), and if the current discount rate of 2.76% were maintained during years 2020 through 2021, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $271 billion (funded ratio of 85.7%) by the end of 2020 and a projected pension deficit of $199 billion (funded ratio of 89.4%) by the end of 2021. For purposes of this forecast, we have assumed 2020 and 2021 aggregate annual contributions of $40 billion and $50 billion, respectively.
Under an optimistic forecast with rising interest rates (reaching 3.11% by the end of 2020 and 3.71% by the end of 2021) and asset gains (10.5% annual returns), the funded ratio would climb to 92% by the end of 2020 and 108% by the end of 2021. Under a pessimistic forecast with similar interest rate and asset movements (2.41% discount rate at the end of 2020 and 1.81% by the end of 2021 and 2.5% annual returns), the funded ratio would decline to 80% by the end of 2020 and 73% by the end of 2021.
MILLIMAN 100 PENSION FUNDING INDEX — MAY 2020 (ALL DOLLAR AMOUNTS IN MILLIONS)
PENSION ASSET AND LIABILITY RETURNS
About the Milliman 100 Monthly Pension Funding Index
For the past 20 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 2019 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2020 Pension Funding Study, which was published on April 28, 2020. 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.