The funded status deficit of the 100 largest US corporate pension plans ballooned to $306 billion in August from $219 billion at the end of July, as their funded ratio fell to 83.8% from 87.7%, according to actuarial and consulting firm Milliman.
The firm attributed the widening deficit to a sharp drop in the benchmark corporate bond interest rates that are used to value pension liabilities, although it said its effect was somewhat dampened by strong investment returns from fixed-income asset holdings.
Milliman analyzes the 100 largest US corporate pension plans through its Pension Funding Index (PFI). In August, the PFI monthly discount rate fell 42 basis points to 2.95%, which was the lowest recorded since the index was launched 19 years ago. It was also the first time the Milliman 100 PFI had reported a discount rate below 3.00%.
“Discount rates have fallen by 110 basis points over the past 12 months, slashing corporate pension funding and hitting an all-time low for the PFI,” Zorast Wadia, co-author of the Milliman 100 PFI, said in a statement. “In fact, at this time last year the funded ratio for these plans was roughly 10 percentage points higher, at 93.1%, than we’re seeing now.”
The projected benefit obligation (PBO) increased $104 billion during August, raising the Milliman 100 PFI liability value to $1.887 trillion from $1.783 trillion at the end of July. It was the first time the PBO had increased by at least $100 billion since a $117 billion increase in January 2015.
The aggregate asset value of the Milliman 100 PFI increased $17 billion to $1.581 trillion thanks to August’s 1.33% investment return. That was more than twice the monthly median expected investment return of 0.53% forecasted by the the 2019 Milliman Pension Funding Study.
Over the 12 months from September 2018 to August, the cumulative asset return for pensions in the Millman 100 has been 6.76%.
Milliman said that if the companies in its index were to earn the expected 6.6% median annual asset return, per the 2019 pension funding study, assuming a discount rate of 2.95% through 2020, the funded status would increase to 84.9% by the end of 2019, and 88.5% by the end of 2020.