(January 8, 2012) — Historic low interest rates have widened pension funding deficit in 2012, an analysis by Milliman has shown, with the top 100 US-based schemes in the firm’s study on average 76.4% funded as of December 31.
After slight improvements in November and December, pension funding deficit among the 100 pension’s in Milliman’s study still increased by $74 billion for all of 2012 compared to the previous year.
While defined benefit plans offered by the 100 US employers with the largest pension programs were on average 76.4% funded as of December 31, that percentage is up from 74% in November and 72.6% in October. However, it is far below the 78.7% average funding level at the end of 2011.
In total the plans were underfunded by $411.8 billion at the end of 2012, the biggest year-end funding deficit in the 12 years Milliman has conducted such surveys.
The analysis was based on the firm’s latest Pension Funding Index.
John Ehrhardt, co-author of the Milliman Pension Funding Study, noted that while it was a good year on the asset side, with the 100 pensions of the index experiencing a $90 billion gain, it was a rough year on the liability side, with interest rates driving a $164 billion increase in the pension benefit obligation (PBO). “People may be getting tired of hearing me saying it but interest rates have been the story for the last four years and that’s not going to change in 2013,” Ehrhardt said in a statement.
Milliman’s report follows research by Mercer that found that the aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $73 billion to a record year-end high of $557 billion as of December 31 2012.
Despite overall positive annual asset growth of approximately 16% in the broad US equity market, falling interest rates have continued to pummel the funding status of pension plans, Mercer said.
“Despite US and non-US equity indices outperforming expectations, interest rates on high quality corporate bonds declined by more than 80 basis points in the calendar year, driving discount rates down and plan liabilities up significantly, with the overall result a significant decline in funded status for most plans,” asserted Jonathan Barry, a partner with Mercer’s retirement consulting group, in a statement. “We also saw wide fluctuations in funded status through the year – with the aggregate funded status peaking at about 82% at the end of March, and hitting a low of 70% at the end of July – the largest month-end deficit we have seen since we began tracking this information.”