In July, the funded status of the 100 largest corporate defined benefit pension plans dropped by $5 billion as measured by the Milliman 100 Pension Funding Index (PFI). The deficit rose to $453 billion at the end of July due to the dual effect of a decrease in the benchmark corporate bond interest rates used to value pension liabilities and robust investment returns. As of July 31, the funded ratio essentially remained flat at 75.7%, compared to 75.6% at the end of June.

The projected benefit obligation (PBO), or pension liabilities, increased to $1.868 trillion at the end of July from $1.839 trillion at the end of June. The change resulted from a decrease of 12 basis points in the monthly discount rate to 3.33% for July, from 3.45% for June. The discount rate at the end of July is the lowest it has been in the 16-year history of the Milliman 100 PFI.

July’s discount rate decline was not all bad news for those plan sponsors with heavy allocations towards fixed income. The market value of assets of the Milliman 100 plans increased by $23 billion as a result of July’s investment gain of 2.08%. The Milliman 100 PFI asset value increased to $1.415 trillion at the end of July. July’s strong investment return was only second to March’s 2.87% return during 2016.

Over the last 12 months (August 2015 – July 2016), the cumulative asset return for these pensions has been 4.10% and the Milliman 100 PFI funded status deficit has deteriorated by $186 billion. The rise in the funded status deficit over the past 12 months is primarily due to decreases in discount rates. The funded ratio of the Milliman 100 companies has decreased over the past 12 months to 75.7% from 84.3%.

If the Milliman 100 PFI companies were to achieve the expected 7.2% median asset return (as per the 2016 pension funding study), and if the current discount rate of 3.33% were maintained during years 2016 and 2017, we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $440 billion (funded ratio of 76.5%) by the end of 2016 and a projected pension deficit of $403 billion (funded ratio of 78.4%) by the end of 2017.