US corporate pension plans saw their largest growth year-to-date in September with a $26 billion increase in funded status, raising their funded ratio to 84.3% from 83% during the month, according to consulting and actuarial firm Milliman.
According to Milliman’s most recent Pension Funding Index (PFI), which analyzes the 100 largest US corporate pension plans, the deficit fell to $272 billion due to interest rate and market value gains in September.
“While September’s positive performance is welcome news for these pensions, it’s tempered somewhat by the recent release of the new mortality tables by the IRS,” said Zorast Wadia, co-author of the Milliman 100 PFI, in a statement. “Much of the fourth quarter will be spent in anticipation of how the new regulation will affect 2018 cash contribution funding, PBGC premiums, and de-risking efforts.”
The Milliman 100 PFI asset value grew by $6 billion as a result of September’s 0.78% investment gain to $1.465 trillion, with cumulative year-to-date investment gains of 8.34%. In contrast, the 2017 Milliman Pension Funding Study reported that the monthly median expected investment return during 2016 was 0.57%, or 7% on an annualized basis.
The projected benefit obligation (PBO), or pension liabilities, decreased to $1.737 trillion at the end of September from $1.757 trillion at the end of August. The change resulted from an increase of nine basis points in the monthly discount rate to 3.69% for September from 3.60% for August.
For Q3, Milliman reported that the funded status of the 100 largest US corporate pension plans improved by $13 billion, primarily due to September’s gains.
Milliman also reported that between October 2016 and September 2017, the cumulative asset return for the 100 largest pensions was 8.30%, while the Milliman 100 PFI funded status deficit improved by $129 billion. During that time, rates rose to 3.69% from 3.42%, while the funded ratio of the Milliman 100 companies grew to 84.3% from 77.9%.
“This bit of positive news comes on the heels of the release of the new mortality tables regulation by the IRS,” said Milliman. “The new mortality tables will affect 2018 cash contribution funding, Pension Benefit Guaranty Corporation (PBGC) premiums, and pension risk transfers via lump-sum payments.”
Milliman said that under an “optimistic forecast,” in which interest rates rise to 3.84% by the end of 2017, and 4.44% by the end of 2018, with 11% annual returns, the funded ratio would climb to 87% by the end of 2017 and 101% by the end of 2018. However, a pessimistic forecast that anticipates a 3.54% discount rate at the end of 2017, and 2.94% by the end of 2018, with only 3% annual returns, would see the funded ratio decline to 83% by the end of 2017, and to 76% by the end of 2018.