The 100 largest US corporate defined benefit pension plans saw a $20 billion increase in funded status in February thanks to a strong monthly investment gain, and an increase in the benchmark corporate bond interest rates used to value pension liabilities, according to consulting firm Milliman.
As a result, the funding ratio of the plans rose to 92.6% as of Feb. 28, from 91.4% at the end of January.
The aggregate market value of the funds’ assets increased $15 billion to $1.525 trillion as a result of February’s 1.24% investment gain. At the same time, pension liabilities decreased $5 billion to $1.648 trillion at the end of the month, which was the result of a 2 basis point increase in the monthly discount rate to 4.08% from 4.06% in January. Over the first two months of 2019, the aggregate deficit of the funds has fallen by $45 billion.
“February’s investment gains continue to propel corporate pension funding in the right direction, adding to an already positive start to the year,” Zorast Wadia, co-author of the Milliman 100 Pension Funding Index (PFI), which tracks the funds, said in a release. However, he added that “while the gains of the past two months are good news for these pensions, we’ve still not fully recovered from the $70 billion hole created last December.”
Over the last 12 months, the cumulative asset return for the pensions was 2.6% and the Milliman 100 PFI funded status deficit improved by $22 billion. The firm said the funded status gain is the result of the general upward trend in discount rates during most of 2018.
Milliman forecasted that if the 100 companies’ pension funds were to earn the expected 6.8% median asset return as per the 2018 pension funding study, and if the current discount rate of 4.08% was maintained during 2019 and 2020, the funded status of the plans would increase. The result would be an estimated pension deficit of $71 billion, and a funded ratio of 95.7% by the end of 2019, and a projected pension deficit of $7 billion, and a funded ratio of 99.5% by the end of 2020. Under this forecast, Milliman has assumed aggregate annual contributions of $52 billion in 2019 and 2020.
The firm also said that under an optimistic forecast that assumes annual asset returns of 10.8%, with interest rates rising to 4.58% by the end of 2019 and 5.18% by the end of 2020, the funded ratio of the 100 funds would climb to 105% by the end of 2019 and 121% by the end of 2020.
However, under a pessimistic forecast that assumes 2.8% annual returns and a discount rate of 3.58% at the end of 2019 and 2.98% by the end of 2020, the funded ratio would decline to 87% by the end of 2019 and 81% by the end of 2020.