Milliman analysis: Rising discount rates boost corporate pension funded ratio to 102.4% despite financial market declines in January and February

Milliman 100 PFI discount rate climbs 56 basis points since 2021 year-end

The funded status of the 100 largest corporate defined benefit pension plans improved by $25 billion during February as measured by the Milliman 100 Pension Funding Index (PFI). An increase in the benchmark corporate bond interest rates used to value pension liabilities led to a decrease in these liabilities, representing a gain of $56 billion for the month. As of February 28, the funded ratio for the Milliman 100 plans rose to 102.4%, up from 100.9% at the end of January 2022, and the funded status surplus increased to $46 billion. The funded status improvement in 2022 thus far is impressive considering the heavy financial market declines of the opening two months of 2022.

The market value of assets fell by $31 billion as a result of February’s 1.40% investment loss. The Milliman 100 PFI asset value decreased to $1.752 trillion as of February 28, 2022, from $1.783 trillion as of January 31, 2022. By comparison, the 2021 Milliman Pension Funding Study reported that the monthly median expected investment return during 2020 was 0.50% (6.2% annualized).

The projected benefit obligation (PBO), or pension liabilities, decreased by $56 billion to $1.711 trillion at the end of February 2022 from $1.767 billion as of January 31, 2022. The change resulted from a 24-basis-point increase in the monthly discount rate, to 3.36% for February from 3.12% for January 2022. Discounts rates have spiked by 56 basis points in just the first two months of 2022.

Over the last 12 months (March 2021 to February 2022), the cumulative asset return for these pensions has been 4.02%, and yet the Milliman 100 PFI funded status deficit has improved by $132 billion. Discount rate increases are the main driver of the funded status improvement. The funded ratio of the Milliman 100 companies has increased to 102.4% from 95.1% over the past 12 months.

The projected asset and liability figures presented in this analysis will be adjusted as part of our annual 2022 Pension Funding Study (PFS), where pension settlement and annuity purchase activities that occurred during 2021 will be reflected. Pension plan accounting information disclosed in the footnotes of the Milliman 100 companies’ annual reports for the 2021 fiscal year is expected to be available during the first quarter of 2022 and will also be part of the 2022 PFS. We expect to publish our comprehensive recap in April.

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

 

2022-2023 projections

If the Milliman 100 PFI companies were to achieve the expected 6.2% median asset return (as per the 2021 PFS), and if the current discount rate of 3.36% were maintained during 2022 and 2023, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension surplus of $84 billion (funded ratio of 105.0%) by the end of 2022 and a projected pension surplus of $139 billion (funded ratio of 108.3%) by the end of 2023. For purposes of this forecast, we have assumed 2022 and 2023 aggregate annual contributions of $28 billion.

Under an optimistic forecast with rising interest rates (reaching 3.86% by the end of 2022 and 4.46% by the end of 2023) and asset gains (10.2% annual returns), the funded ratio would climb to 115% by the end of 2022 and 133% by the end of 2023. Under a pessimistic forecast with similar interest rate and asset movements (2.86% discount rate at the end of 2022 and 2.26% by the end of 2023 and 2.2% annual returns), the funded ratio would decline to 95% by the end of 2022 and 87% by the end of 2023.

MILLIMAN 100 PENSION FUNDING INDEX — FEBRUARY 2022 (ALL DOLLAR AMOUNTS IN MILLIONS)

 

PENSION ASSET AND LIABILITY RETURNS

About the Milliman 100 monthly Pension Funding Index

For the past 21 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 2020 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2021 Pension Funding Study, which was published on April 7, 2021. 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.