pension plans’ funded ratio dipped to 81.5% for February, from 81.6% for
January, according to Milliman. The funded ratio, based on the 100 largest
defined benefit pension plans of US public companies, had been rising in the
previous five months, and is up about 3% over the past 12 months. It dipped in
February as a result of a drop in the discount rate to 3.89%, from 4% for
January, according to the Seattle actuarial firm.
gains of 1.74% in February helped counter the negative effect from discount
rates somewhat. “While February’s strong investment
gains helped soften the blow dealt by the discount rate decline, all eyes are
on interest rates right now,” said Zorast Wadia, a Milliman consulting actuary.
If the Federal Reserve
goes through with a series of interest rate hikes this year, it would benefit corporate pension plan funded ratios. Milliman anticipates that
if interest rates touch 4.39% by the end of this year, and 4.99% at the end of
2018, accompanied by annual investment gains of 11.2%, the funded ratio would
climb to 91% by year end, and 104% by the end of 2018.
On the other hand, if
discount rates were to drop to 3.39% at the end of 2017, and 2.79% by year end
2018, and investment gains were a less robust 3.2% for each year, Milliman
sees the funded ratio declining to 75 % by the end of 2017. In this scenario,
it could even go down to 69% by the end of 2018.
In contrast, Wilshire
Consulting reports that the funded ratio for US corporate pension plans edged
up 0.2% for February, to 83.4%. It is also up about 7% over the year. The
Wilshire report is based on the corporate pension plans of S&P 500
According to the Santa Monica, Calif., investment advisory firm,
asset values were up 1.9% for February, outpacing a 1.6% rise in liability
values, causing the corporate pension plan funded ratio to go up.
Although both the Milliman corporate
funded ratio and the Wilshire corporate funded ratio were based on a drop in
discount rates for February, in the Wilshire model, the asset value rise offset
the impact of the rise in liability values. In the Milliman model, the impact
of the dip in the discount rate was stronger than the impact of investment
gains, causing the Milliman corporate funded ratio to drop for February.
Ned McGuire, a member of the
Pension Risk Solutions Group of Wilshire Consulting, noted, “This month’s
increase was primarily driven by the continued post-election increase in equity
markets, lifting the Wilshire 5000 Total Market Index 3.7% during February.”
McGuire expects that if interest
rates rise further this year, the liability value of defined benefit corporate
pension plans will decline. He expects that if investment returns continue to
rise as well, corporate funded ratios will also rise this year.
By Poonkulali Thangavelu