US Corporate Pensions See Largest Monthly Funding Gain Since 2003

Funding boost helped by combination of robust investment gains and rising discount rates.

The 100 largest US corporate defined benefit (DB) pension plans had their largest monthly funding increase in 17 years in August with a funding gain of $93 billion, according to consulting and actuarial firm Milliman.
Milliman, which tracks the funded status of the plans through its Milliman 100 Pension Funding Index (PFI), reported that the aggregate deficit of the plans fell to $293 billion due to a combination of investment gains and liability declines.
“August was a great month for corporate pensions, as discount rates finally increased and the market value of assets improved as well,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. “The fact that the funded status improved by a near-record-setting amount of $93 billion only serves to underline how the low-discount rate environment has been a drag on these pensions in 2020.”
As of the end of August, the plans’ aggregate funded ratio rose to 85.1% from 81.1% at the end of July, reversing four straight months of declining funding ratios. The $93 billion funded status improvement for the month was the second-largest monthly increase in the 20-year history of the Milliman 100 PFI, behind only July 2003, when the monthly increase soared $203.8 billion higher.
The robust 0.94% investment gain for the month boosted the asset value of the Milliman 100 PFI by $11 billion to $1.671 trillion from $1.660 trillion at the end of July, bringing the total return year-to-date to 5.6%. By comparison, the monthly median expected investment return during 2019 was 0.53%. Milliman said the gain marks five consecutive months of above-average returns, which more than offset the losses from the first quarter market downturn.
Meanwhile, the projected benefit obligation fell during August, decreasing the Milliman 100 PFI value to $1.964 trillion thanks to a 28 basis point (bps) increase in the monthly discount rate to 2.54% for August from 2.26% in July. The firm said the July discount rate was the lowest discount rate seen in the Milliman 100 PFI’s 20-year history.
Although the cumulative investment return for the plans was a strong 9.25% for the 12 months from September 2019 to August, the funded status deficit for the plans only improved by $2 billion. Milliman attributed this “meager improvement” to falling discount rates. Because discount rates had fallen to 2.54% at the end of August from 2.95% at the same time last year, the funded ratio of the Milliman 100 companies only edged up to 85.1% from 84.3% during that time.
Milliman projected that if the 100 plans were to achieve the expected 6.5% median asset return per the 2020 pension funding study, and if the current discount rate of 2.54% were maintained through 2021, the funded ratio of the plans would rise to 86.1% by the end of 2020 and 90% by the end of 2021. The forecast is using assumed 2020 and 2021 aggregate annual contributions of $40 billion and $50 billion, respectively.
Under a more optimistic forecast that has interest rates rising to 2.74% by the end of 2020 and 3.34% by the end of 2021, with 10.5% annual investment returns, Milliman said the funded ratio would climb to 90% by the end of 2020 and 105% by the end of 2021. However, under a pessimistic forecast with the discount rate dropping to 2.34% at the end of 2020 and 1.74% by the end of 2021, with only 2.5% annual investment returns, the firm projects the funded ratio would fall to 83% by the end of 2020 and 76% by the end of 2021.

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