The 100 largest US corporate pension plans saw a $23 billion increase in funded status in June as their aggregate deficit fell to $118 billion from $141 billion at the end of May, according to consulting firm Milliman.
Meanwhile, the aggregate funding level of those pension plans increased to 92.8% as of June 30, from 91.6% at the end of May, despite registering an investment loss of 0.09% for the month. By comparison, the monthly median expected investment return during 2017 was 0.55% (6.8% annualized). Milliman attributed the improvement to an increase in the benchmark corporate bond interest rates used to value pension liabilities, which saw discount rates increase 13 basis points to 4.12% from 3.99% over the same time period.
“Six months into 2018 and corporate pensions are well ahead of where they started at the beginning of the year,” Zorast Wadia, a principal and consulting actuary at Milliman, said in a release. “The rise in discount rates has helped these pensions stay on track, with June marking the highest rate since January 2016. This is despite investment performance falling short of expectations so far in 2018.”
The asset value of the 100 largest US corporate pension plans declined to $1.526 trillion at the end of June from $1.531 trillion at the end of May. During the same time, the projected benefit obligation decreased $28 billion during June. The projected benefit obligation is how much a company will need today to cover future pension liabilities.
For the quarter ending June 30, the plans’ assets saw a net investment gain of 0.61%, which Milliman said was short of expectations. However, discount rates increased 21 basis points during the quarter, which resulted in a net funded status improvement of $40 billion. At the same time, the funded status deficit shrank to $118 billion. The funded ratio of the plans of the 100 largest US companies increased 2.2% from 90.6% at the end of the first quarter, which was mainly due to discount rate gains.
Milliman said that using an optimistic forecast of interest rates rising to 4.42% by the end of 2018, and 5.02% by the end of 2019, combined with annual asset gains of 10.8%, the funded ratio of the plans would increase to 100% by the end of 2018, and 116% by the end of 2019. However, under a pessimistic forecast that involves a 3.82% discount rate at the end of 2018, and 3.22% by the end of 2019 combined with annual returns of just 2.8%, the plans’ funded ratio would decline to 89% by the end of 2018, and 83% by the end of 2019.