The funded status of the 100 largest US corporate pension plans rose by $7 billion in October to 84.7%, from 84.3% at the end of September, according to the latest Pension Funding Index (PFI) from consulting and actuarial firm Milliman.
Added to September’s increase of $25 billion, the funded status of the largest 100 US corporate pension plans has improved by $32 billion since Aug. 31, while their deficit fell to $266 billion. The October gains came from investment returns of 1.19% for the month, bringing the cumulative investment gain in 2017 to 9.57% year-to-date. The market value of assets rose by $12 billion as a result of October’s investment gain.
The funded status improvement was partially offset by pension liability increases resulting from a decrease in the benchmark corporate bond interest rates used to value the liabilities.
“While October’s investment returns are well above expectations, funded status gains were partially offset by the continued low discount rate environment,” said Zorast Wadia, co-author of the Milliman 100 PFI. “It will be interesting to see what, if any, changes are in store to interest rate strategy with the nomination of a new Fed chair.”
The Milliman 100 PFI asset value increased to $1.476 trillion at the end of October. The projected benefit obligation (PBO), or pension liabilities, increased to $1.742 trillion at the end of October, from $1.737 trillion at the end of September. The change resulted from a decrease of three basis points in the monthly discount rate to 3.66% for October from 3.69% for September.
Between November 2016 and October 2017, the cumulative asset return for the pensions is 10.53%, while the Milliman 100 PFI funded status deficit has improved by $105 billion during that time. The company said discount rates experienced a small increase over the last 12 months, rising to 3.66% as of Oct. 31, from 3.61% a year earlier. Meanwhile, the funded ratio of the Milliman 100 companies has increased over the past 12 months to 84.3% from 79.0% due primarily to higher-than-expected investment returns.
Milliman said that if the 100 largest US corporate pension plans were to achieve the expected 7.0% median asset return, and if the current discount rate of 3.66% held steady for 2017 and 2018, the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $259 billion (85.1% funded) by the end of 2017, and $212 billion (87.8% funded) by the end of 2018. The figures use assumed 2017 aggregate contributions of $36 billion, and 2018 aggregate contributions of $39 billion.
The company also said an optimistic forecast that includes interest rates reaching 3.76% by the end of 2017, and 4.36% by the end of 2018, with 11.0% annual returns, would see the funded ratio climb to 87% by the end of 2017, and 100% by the end of 2018. However, a pessimistic forecast of a 3.56% discount rate at the end of 2017 and 2.96% by the end of 2018, with only 3.0% annual returns, would see the funded ratio decline to 84% by the end of 2017, and to 77% by the end of 2018.