The funded status of the 100 largest corporate defined benefit pension plans grew by $4 billion during July, according to consulting and actuarial firm Milliman’s most recent Pension Funding Index (PFI).
The funded-status deficit declined to $282 billion from $286 billion at the end of June due to strong July investment gains, the report said. The funded status improvement came as the benchmark corporate bond interest rates used to value pension liabilities continued a decline that began in April. As of July 31, the funded ratio nudged 0.2% higher to 83.7%, from 83.5% at the end of June, and the funded ratio has been vacillating between 83% and 84% over the first seven months of 2017.
“Given the relatively strong market returns contrasted with persistently low interest rates, it’s no surprise that there’s been little movement this year in the funded ratio for the Milliman 100 plans,” said Zorast Wadia, co-author of the Milliman 100 PFI. “With the lack of funded ratio improvement, we’re seeing a number of sponsors make additional contributions with an eye towards shoring up funded status in the future.”
The 0.93% investment gain for July raised the Milliman 100 PFI asset value to $1.450 trillion from $1.442 trillion at the end of June. So far, the cumulative investment gain for the year is 6.50%. By contrast, the 2017 Milliman Pension Funding Study reported that the monthly median expected investment gain during 2016 was 0.57%.
The projected benefit obligation (PBO) increased by $4 billion during July, raising the Milliman 100 PFI value to $1.732 trillion from $1.728 trillion at the end of June. The change resulted from a three-basis-point decrease in the monthly discount rate to 3.71% for July, from 3.74% in June, according to Milliman.
Between August 2016 and July 2017, the cumulative asset return for the pensions has been 6.8%, and during that time the Milliman 100 PFI funded status deficit has improved by $141 billion. Discount rates increased over the last 12 months, moving from 3.33% as of July 31, 2016, to 3.71% one year later.
“If the Milliman 100 PFI companies were to achieve the expected 7.0% median asset return (as per the 2017 pension funding study),” said the report, “and if the current discount rate of 3.71% was maintained during years 2017 and 2018, we forecast the funded status of the surveyed plans would increase.”
Milliman said this would result in a projected pension deficit of $265 billion (funded ratio of 84.7%) by the end of 2017, and a projected pension deficit of $220 billion (funded ratio of 87.3%) by the end of 2018. For purposes of the forecast, Milliman has assumed 2017 aggregate contributions of $36 billion, and 2018 aggregate contributions of $39 billion.
It said that under an optimistic forecast with rising interest rates, reaching 3.96% by the end of 2017 and 4.56% by the end of 2018, and asset gains of 11.0% annual returns, the funded ratio would climb to 89% by the end of 2017, and 102% by the end of 2018. However, using a pessimistic forecast with similar interest rate and asset movements, Milliman said the funded ratio would decline to 81% by the end of 2017, and 74% by the end of 2018.
“As Congress has adjourned for August, we continue to wait for any details that could emerge for ‘tax reform’ and how that could affect the funded ratio of these large DB plans,” said the report.