US Corporate Pension Funded Ratio, Risk Transfer Costs Decline in April

Despite a strong monthly investment gain of 3.93%, the 100 largest US corporate defined benefit (DB) pension plans saw their funding ratios decline in April to 84% from 86.3% thanks to falling discount rates, according to actuarial and consulting firm Milliman.

The funded status of the plans as measured by the Milliman 100 Pension Funding Index (PFI) worsened by $58 billion and the deficit grew to $299 billion from $241 billion at the end of March, due to the benchmark corporate bond interest rates used to value pension liabilities tumbling 47 basis points (bps) to 2.92% from 3.39% during the month.

“That familiar antagonist—low discount rates—has struck corporate pensions again in April, eroding any market rebound pensions might have experienced,” Zorast Wadia, author of the Milliman 100 PFI, said in a release.

The robust monthly investment gain increased the aggregate asset value of the plans by $55 billion to $1.571 trillion at the end of April. The rate of return easily outpaced the monthly median expected investment return during 2019 of 0.53%. Meanwhile, the projected benefit obligation increased by $113 billion during April to $1.870 trillion as a result of the falling monthly discount rate.

Over the 12 months from May 2019 to the end of April 2020, the cumulative asset gain for the plans was 5.49%, while the Milliman 100 PFI funded status deficit grew by $159 billion. The worsening of the funded status deficit over that time is also attributed to the decline in discount rates over the past 12 months. During that period, discount rates decreased to 2.92% as of the end of April from 3.85% at the same time last year. During that time, the funded ratio of the plans decreased sharply to 84.0% from 91.7%.

Milliman said that if the 100 companies in its index were to achieve the expected 6.5% median asset return per the 2020 Pension Funding Study, and if the current discount rate of 2.92% was maintained through 2021, the funded ratio of the plans would increase to 86% by the end of 2020 and 89.6% by the end of 2021. For purposes of the forecast, Milliman assumed 2020 and 2021 aggregate annual contributions of $40 billion and $50 billion, respectively.

Under an optimistic forecast that has the discount rate rebounding to 3.32% by the end of 2020 and 3.92% by the end of 2021, with strong annual asset returns of 10.5%, the funded ratio would surge to 93% by the end of 2020 and 109% by the end of 2021. However, under a pessimistic forecast that has rates falling further to 2.52% at the end of 2020 and 1.92% by the end of 2021, with tepid 2.5% annual returns, the funded ratio would drop to 79% by the end of 2020 and 73% by the end of 2021.

Milliman also reported that the estimated cost to transfer retiree pension risk to an insurer decreased slightly to 105.5% of a plan’s total liabilities from 105.7% of those liabilities during April. This means the estimated retiree pension risk transfer (PRT) cost for the month was 5.5% more than those plans’ retiree accumulated benefit obligation. The decrease was attributed to discount rates dropping faster than annuity purchase rates, which led to the relative cost of annuities declining slightly.

“Annuity purchase rates steadily decreased in January and February, increased 71 basis points during March and then dropped again by 51 basis points in April,” said Mary Leong, a consulting actuary with Milliman. “Overall, the recent swing in rates has shown the volatility in interest rates as we continue to track annuity retiree buyout costs each month.”