Defying forecasts of another grim month due to global market volatility, the funded status of the 100 largest US corporate pension funds surprisingly increased $93 billion in March despite deteriorating economic conditions amid the COVID-19 pandemic.
Just a month after hitting its lowest level in more than three years the Milliman 100 Pension Funding Index (PFI), which tracks the funded ratio for the 100 largest corporate pension plans in the US, rose to 85.6% from 82.1% at the end of February. Consulting firm Milliman said the funding improvement was the direct result of a strong surge in the monthly discount rate to 3.39% from 2.69%.
“It’s a stunning twist of fate that a month so turbulent as March—given the market conditions and the ongoing global pandemic—actually resulted in positive funding news for corporate pensions,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. A month ago, Wadia predicted that “March will likely be another dismal month for corporate pension funding.”
During March, the tumbling stock markets led to an $85 billion decline in the market value of the pension funds’ assets to $1.516 trillion from $1.601 trillion at the end of February. This is based on a monthly loss of 5.08%. Milliman said there were only five other months during the last two decades when there has been larger investment losses, and the last one was October 2008 during the Great Recession.
At the same time, the projected benefit obligation (PBO), or pension liabilities, decreased to $1.771 trillion at the end of March.
While February’s discount rate was the lowest discount recorded in the 20-year history of the Milliman 100 PFI, March’s discount rate increase was the fifth largest ever recorded in the study. The last time the discount rate posted a comparable increase was in December 2009.
For the first quarter of 2020, a 5.7% investment loss caused the assets of the pension funds to fall by $103 billion compared to plan liabilities, which increased $48 billion. Discount rates increased 19 basis points (bps) during the quarter and helped limit the funded status erosion. The net result was a funded status worsening of $55 billion as the funded ratio of the Milliman 100 companies decreased to 85.6% at the end of March from 89% at the beginning of the year.
Over the last 12 months through March, the cumulative asset return for the pensions was 2.6%, and their funded status deficit has widened by $81 billion. The funded status loss is the combined result of declines in discount rates during most of 2019 and investment losses experienced during the first quarter. Discount rates fell 39 basis points over the past year to 3.39% as of March 31.
Milliman said if the companies in its index earn the expected 6.6% median asset return per the 2019 pension funding study, and if the discount rate stays at 3.39% through 2021, the funded status of the surveyed plans would increase to 88.1% by the end of 2020 and 91.6% by the end of 2021. For purposes of the forecast, the firm assumed 2020 and 2021 aggregate annual contributions of $50 billion.
It also said that under an optimistic forecast that has interest rates rising to 3.84% by the end of 2020 and 4.44% by the end of 2021, with annual asset gains of 10.6%, the funded ratio would climb to 96% by the end of 2020 and 112% by the end of 2021. However, under a pessimistic forecast that assumes a discount rate of 2.94% at the end of 2020 and 2.34% by the end of 2021, with 2.6% annual returns, the funded ratio would decline to 81% by the end of 2020 and 74% by the end of 2021.