2019 Funding Ratio Drops Despite November Lift in US Corporate Pension Investment Returns

Milliman warns a December correction could be ‘disastrous’ for pensions.
Investment gains helped boost the funded ratio for the 100 largest corporate plans, which rise to 86.8% from 86.1% during November, while the funded deficit for the year is still deeper, according to consulting and actuarial firm Milliman.

During the month the aggregate deficit of plans decreased to $243 billion, while the benchmark corporate bond interest rates that are used to value pension liabilities remained flat again in November. As of the end of November, pension funding has improved by $64 billion over the past three months, mainly due to positive market performance.

The total asset value of the Milliman 100 PFI, which tracks the funded levels of the 100 largest corporate pension plans in the US, rose by $11 billion to $1.604 trillion at the end of November from $1.593 trillion at the end of October. The rise was  spurred by a 0.93% investment return for the month. This compares with the monthly median expected investment return during 2018 of 0.53% as reported in the 2019 Milliman Pension Funding Study.

“Market performance in 2019 has been better than expected for corporate pensions, helping counteract the effect of the low discount rate environment on funding,” Zorast Wadia, lead author of the Milliman 100 PFI, said in a statement.

But the strong returns haven’t been enough to prevent the Milliman 100 PFI funded status deficit from widening. The firm said the plans’ funded status deficit grew by $143 billion during the 12 months through November, despite achieving a 12.44% cumulative asset return during the same period. Milliman attributed this to the falling discount rates, which dropped to 3.09% at the end of November from 4.41% at the same time last year.

As a result, the funded ratio of the Milliman 100 companies has fallen to 86.8% from 93.6% over the last 12 months. Despite the strong investment returns for the year, Wadia warned that a reversal of fortune this month could hit the plans particularly hard.

“Let’s hope history doesn’t repeat itself this December,” he said, “as a market correction like we saw in 2018 combined with low discount rates could be disastrous for corporate pensions.”

In December 2018 the S&P 500 and the Dow had their worst December since 1931, and their biggest monthly loss since February 2009 as they and the Nasdaq fell at least 8.7% during the month.

During November, the projected benefit obligation (PBO) of the plans decreased by $4 billion, lowering the Milliman 100 PFI value to $1.847 trillion from $1.851 trillion at the end of October. The drop in value was due to a one basis point increase in the monthly discount rate to 3.09% for November from 3.08% in October. Milliman said discount rates have been flat over the past two months and are among the lowest seen in the Milliman 100 PFI’s 19-year history.

The forecast said that if the Milliman 100 PFI companies earn the expected 6.6% median asset return, and if the discount rate of 3.09% were maintained through the end of 2021, the funded status of the plans would increase to 90.8% by the end of 2020. It would reach 94.6% by the end of 2021. The forecast assumes 2020 and 2021 aggregate annual contributions of $50 billion.

Under an optimistic forecast with interest rates rising to 3.74% by the end of 2020 and 4.34% by the end of 2021, and annual asset gains of 10.6%, the funded ratio would climb to 103% by the end of 2020 and 120% by the end of 2021. Under a pessimistic forecast, however, with discount rates falling to 2.44% at the end of 2020 and 1.84% by the end of 2021, and with annual asset returns of 2.6%, the funded ratio would fall to 80% by the end of 2020 and 73% by the end of 2021.

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