The 100 largest US corporate pension plans saw their funded status plunge $65 billion in May, due to a combination of poor investment returns and a decrease in the benchmark corporate bond interest rates used to value pension liabilities, according to actuarial and consulting firm Milliman. The decrease caused the plans’ funding ratio to fall to 87.9% from 91.4% at the end of April.
“May was a dismal month for corporate pensions, hitting plans with a double-whammy of poor equity returns and declining discount rates,” said Zorast Wadia, co-author of the Milliman 100 PFI, which tracks the 100 largest US corporate pension plans. “In fact, May’s heavy losses bring pension funding lower than where it was at the start of 2019, and mark the third-largest monthly funding decline in the past five years.”
Only January 2015 and December 2018 saw larger declines, when the PFI lost $70 billion and $97 billion, respectively.
The plans’ cumulative investment return for the month was a loss of 0.74%, which resulted in a $15 billion decrease in the market value of their assets to $1.521 trillion at the end of May. Meanwhile, the deficit widened to $210 billion from $145 billion at the end of April.
The projected benefit obligation of the Milliman 100 PFI increased $50 billion during May to $1.731 trillion, which was due to a decrease of 24 basis points in the monthly discount rate to 3.61% for May from 3.85% in April. This was the lowest discount rate since December 2017 when it was 3.53%.
“While we don’t forecast interest rates,” said the report, “the gradual decrease in rates has been quite noticeable in the financial markets in the last few months.”
Over the last 12 months, from June 2018 to May 2019, the cumulative asset gain for the 100 largest corporate pension plans has been 3.72%, and the Milliman 100 PFI funded status deficit has grown by $68 billion. The main reason given for the worsening of the funded status deficit was a decline in discount rates over the past 12 months. During that period, Milliman said discount rates decreased to 3.61% at the end of May, from 3.99% at the end of May 2018, while the funded ratio of the Milliman 100 companies decreased to 87.9% from 91.5% during that time.
Milliman said that if it the companies in its index were to achieve the expected 6.6% median asset return per its 2019 pension funding study, and if the current discount rate of 3.61% were maintained through 2020, the funded status of the plans would increase to 89.8% by the end of 2019, and 93.4% by the end of 2020. The forecast assumes aggregate annual contributions of $50 billion for 2019 and 2020.
The firm also said that under an optimistic forecast with interest rates rising to 3.96% by the end of 2019, and 4.56% by the end of 2020, with 10.6% annual asset returns, the funded ratio would climb to 96% by the end of this year and 111% by the end of 2020. However, under a pessimistic forecast of a 3.26% discount rate at the end of 2019, and 2.66% by the end of 2020, with only 2.6% annual returns, the funded ratio would decline to 84% by the end of this year, and 77% by the end of 2020.