US Corporate Pensions Funding Drops in 2020 Despite Robust Returns

Aggregate investment return of 11.72% wasn’t enough to counter falling interest rates.

Funding for the 100 largest corporate pension plans in the US declined $50 billion last year as their aggregate funding ratio slipped to 88.2% at the end of the year from 89.8% at the end of 2019, according to consulting firm Milliman.

After sharp investment declines in the first quarter, asset returns rebounded strongly during the rest of the year. That rebound helped offset the funded status deterioration that was a result of the discount rates used to value pension liabilities continuing to fall. The funded status deficit of the 100 plans tracked by the Milliman 100 Pension Funding Index (PFI) was at $234 billion at the end of December, which was the lowest monthly funded status deficit during the year.

The discount rates for the plans in the Milliman 100 fell 74 basis points (bps) to 2.46% at the end of 2020 from 3.2% at the end of 2019, and the discount rate at the end of 2020 was the lowest year-end discount rate and second lowest monthly discount recorded in the 20-year history of the PFI.

Net asset performance for the plans was 11.72% for the year, easily beating the expected annual investment gain of 6.5%. And although this increased plan assets by nearly $125 billion for the year, plan liabilities increased $175 billion due to falling interest rates.

“Year-end discount rates have declined in seven of the last 10 years, hitting a new record low in 2020,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. “However, asset returns for the Milliman 100 plans have exceeded return expectations in seven of the last 10 years as well and have been limiting funded status erosion.”

Wadia added that with the new year here, plan sponsors will likely be monitoring the new Congress and the Biden administration for corporate tax policy changes that could impact the pension funding environment, such as an extension of interest rate relief under the Pension Protection Act.

Milliman forecast that if the plans in the index were to earn the expected 6.5% median asset return, and if the discount rate of 2.46% holds steady during 2021 and 2022, their funded status would increase to 92.2% by the end of 2021 and 96.5% by the end of 2022. The forecast assumes aggregate annual contributions of $50 billion for 2021 and 2022.

The firm said that under an optimistic forecast with interest rates rising to 3.06% by the end of 2021 and 3.66% by the end of 2022, with 10.5% annual asset gains, the funded ratio would climb to 104% by the end of 2021 and 123% by the end of 2022. However, under a pessimistic forecast with the discount rate falling to 1.86% at the end of 2021 and 1.26% by the end of 2022, with only 2.5% annual returns, the funded ratio would decline to 81% by the end of 2021 and 75% by the end of 2022.

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