Despite Robust Returns, Funding Level for Top 100 US Corporate Plans Drops in 2019

Record-low rates negate plans’ 15.66% investment return for the year.

Thanks to record-low discount rates the funded level of the 100 largest US corporate pension plans declined in 2019, despite having assets outperform expectations with a robust return of 15.66%.

The Milliman 100 Pension Funding Index (PFI), which tracks the funded levels of the 100 largest US corporate pension plans, said the average funded ratio of those plans fell to 89% at the end of 2019 from 89.4% at the end of 2018.

Milliman, a consulting firm that publishes the index, said despite the strong investment returns in 2019, sharply dropping discount rates resulted in an $30 billion overall drop in plans’ funded status. The Milliman 100 discount rates fell 99 basis points to 3.20% at the end of 2019 from 4.19% at the end of 2018, and the year-end rate was the lowest year-end discount rate in the 19-year history of the index.

“For corporate pensions during 2019, the funded status environment was like trying to fill a bucket full of holes with water,” Zorast Wadia, author of the Milliman 100 PFI, said in a release. “Funding levels would rise given superb asset gains but then quickly recede given offsetting liability movements attributable to ever-falling discount rates.”

The return on assets was a sharp contrast to the 2018 investment loss of 2.94%. Milliman said the past year was favorable for both fixed income and equity investment classes. He said it was the sixth time in the last 10 years that investment returns beat expectations. But while plan assets were up $174 billion for the year, plan liabilities increased $204 billion because of declining interest rates, which resulted in the projected benefit obligation (PBO) surging 17.35%.

The firm said the third quarter was by far the worst of the year. Flat investment returns combined with all-time low rates lead to a $64 billion plunge in funded status during the quarter to drop the funded ratio to 85.4% as of September 30. The fourth quarter, however, proved to be a sharp turnaround as pension assets posted above average returns and discount rates rallied in December to bring total asset value of the Milliman 100 PFI to $1.618 trillion at year-end 2019.

Two elements will be crucial for coming months, Milliman said. If the plans were to earn the expected 6.6% median asset return per its 2019 pension funding study, and if the current discount rate of 3.20% remains through 2021, their funded status would increase to 92.7% by the end of 2020. It also would rise to 96.6% by the end of 2021.  

But under a pessimistic forecast that includes a  discount rate of 2.60% at the end of 2020, and 2.00% at the end of 2021, combined with 2.6% annual returns, the funded ratio would fall to 82% by the end of 2020, and 76% by the end of 2021.

“Looking ahead to 2020,” said Wadia, “many plan sponsors can expect to have a rise in pension expense given the funded status losses suffered by plans during 2019.”

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