Corporate pension plans’ funded ratio dipped to 81.5% for February, from 81.6% for January, according to Milliman. The funded ratio, based on the 100 largest defined benefit pension plans of US public companies, had been rising in the previous five months, and is up about 3% over the past 12 months. It dipped in February as a result of a drop in the discount rate to 3.89%, from 4% for January, according to the Seattle actuarial firm.
Investment gains of 1.74% in February helped counter the negative effect from discount rates somewhat. “While February’s strong investment gains helped soften the blow dealt by the discount rate decline, all eyes are on interest rates right now,” said Zorast Wadia, a Milliman consulting actuary.
If the Federal Reserve goes through with a series of interest rate hikes this year, it would benefit corporate pension plan funded ratios. Milliman anticipates that if interest rates touch 4.39% by the end of this year, and 4.99% at the end of 2018, accompanied by annual investment gains of 11.2%, the funded ratio would climb to 91% by year end, and 104% by the end of 2018.
On the other hand, if discount rates were to drop to 3.39% at the end of 2017, and 2.79% by year end 2018, and investment gains were a less robust 3.2% for each year, Milliman sees the funded ratio declining to 75 % by the end of 2017. In this scenario, it could even go down to 69% by the end of 2018.
In contrast, Wilshire Consulting reports that the funded ratio for US corporate pension plans edged up 0.2% for February, to 83.4%. It is also up about 7% over the year. The Wilshire report is based on the corporate pension plans of S&P 500 companies.
According to the Santa Monica, Calif., investment advisory firm, asset values were up 1.9% for February, outpacing a 1.6% rise in liability values, causing the corporate pension plan funded ratio to go up.
Although both the Milliman corporate funded ratio and the Wilshire corporate funded ratio were based on a drop in discount rates for February, in the Wilshire model, the asset value rise offset the impact of the rise in liability values. In the Milliman model, the impact of the dip in the discount rate was stronger than the impact of investment gains, causing the Milliman corporate funded ratio to drop for February.
Ned McGuire, a member of the Pension Risk Solutions Group of Wilshire Consulting, noted, “This month’s increase was primarily driven by the continued post-election increase in equity markets, lifting the Wilshire 5000 Total Market Index 3.7% during February.”
McGuire expects that if interest rates rise further this year, the liability value of defined benefit corporate pension plans will decline. He expects that if investment returns continue to rise as well, corporate funded ratios will also rise this year.
By Poonkulali Thangavelu