Corporate Pensions Rebound After Q4 Decline

January effect helps boost asset returns and funded levels.

US corporate pension plans bounced back in January after a rough fourth quarter of 2018 as strong investment returns spurred a $19 billion increase in funded status during the month. 

The funding ratio for the Milliman 100 PFI Index, which analyzes the 100 largest US corporate pension plans, rose to 91.0% as of the end of January from 89.7% at the end of December, while the funding status deficit narrowed to $148 billion from $167 billion during the same period.

Zorast Wadia, co-author of the Milliman 100 PFI, said that corporate pension funding is back to the same level it was a year ago despite the market turbulence over the past few months.

“It feels like déjà vu: just like in 2018, the year is off to a great start, with strong asset performance and discount rates above 4%,” Wadia said in a release. “If both hold, we’ll be heading in the direction of full funding, but as history has shown, any uncertainty or market volatility could make this year another bumpy ride.”

Milliman reported that the pension plans’ asset return in January was 3.35%, which outpaced every monthly asset return in 2018. The market value of assets grew by $46 billion to $1.505 trillion from $1.459 trillion at the end of December. This comes after the Milliman 100 PFI experienced its worst funding month of the year in December, with a $68 billion decline in funded status that was the result of a 1.49% investment loss and a drop in the corporate bond interest rates used to value pension liabilities.

The consulting firm forecast that the funded ratio could climb to 104% by the end of 2019 and 121% by the end of 2020 under an optimistic forecast that includes interest rates rising to 4.61% by the end of 2019 and 5.21% by the end of 2020, combined with annual asset returns of 10.8%. However, under a pessimistic forecast that includes a 3.51% and 2.91% discount rate at the end of 2019 and 2020, respectively, with 2.8% annual returns, Milliman said the funded ratio would fall to 85% by the end of 2019 and 79% by the end of 2020.

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