The fortunes of public and corporate pensions continued to diverge in May as public pension funding grew and corporate pension funding declined for the second straight month.
The 100 largest public defined benefit pension plans continued to claw back from a rough first quarter as an aggregate investment return of 2.68% in May helped their funded ratio grow to 71.3% as of the end of the month from 69.8% at the end of April and 66% at the end of March, according to consulting firm Milliman.
Milliman estimates that the aggregate deficit for the plans shrank to $1.547 trillion at the end of May from $1.619 trillion at the end of April, while their asset value grew to $3.836 trillion from $3.750 trillion during the same time frame.
“Most sectors of the market continued their recovery in May, providing positive movement for public pensions,” Becky Sielman, author of the Milliman 100 Public Pension Funding Index, said in a statement. “As the economy reopens across the US, plan sponsors will continue to monitor asset classes with delayed reporting so as to prepare for any remaining fallout from Q1’s market volatility.”
Meanwhile, the aggregate deficit for the 100 largest corporate pension plans in the US grew to $306 billion during May thanks to falling discount rates, which hit near all-time lows for Milliman’s corporate pension funding index. The rate dropped to 2.76%, which canceled out a healthy monthly investment gain of 1.85% and lowered the funding ratio to 84% from 84.5% at the end of April.
It was the second consecutive month in which discount rate decreases nixed strong investment returns. Asset values for the plans increased $24 billion to $1.605 trillion during May, while the projected benefit obligation (PBO) increased by $41 billion to $1.911 trillion thanks to a 16 basis point (bp) slide.
“With discount rates moored below 3% for the second month in a row, corporate pensions have been unable to regain any ground—despite the positive stock market returns,” Zorast Wadia, author of the Milliman 100 Pension Funding Index, said in a statement.
Milliman estimates that if the 100 plans were to earn the expected 6.5% median asset return per the 2020 pension funding study, and if the current discount rate of 2.76% held steady through 2021, their funded status would increase to 85.7% by the end of 2020 and 89.4% by the end of 2021. The forecast assumes aggregate annual contributions of $40 billion and $50 billion for 2020 and 2021, respectively.
Under an optimistic forecast with interest rates rising to 3.11% by the end of 2020 and 3.71% by the end of 2021, coupled with annual asset gains of 10.5%, the funded ratio would climb to 92% by the end of 2020 and 108% by the end of 2021. However, under a pessimistic forecast that has discount rates falling to 2.41% by the end of 2020 and 1.81% by the end of 2021, with annual returns of 2.5%, the funded ratio would fall to 80% by the end of 2020 and 73% by the end of 2021.