Combination of an 87-basis-point surge in interest rates and
an 11.2% investment gain powers a historic year in pension funded status
improvement. 2013 ends with one-year funded status gain of $318 billion, making
it the best year for pension plans in the 13-year history of the Milliman 100
PFI.
Year in review:
Finally, a win-win year for the corporate pension plans of
the Milliman 100 Pension Funding Index (PFI) as liabilities decreased by $190
billion and assets increased by $128 billion. This is the first time since our
year-end 2007 report that liabilities decreased and assets increased in the
same year. Interest rates rose in 2013 after four consecutive years of declines
from 2009 to 2012. Investment returns for the Milliman 100 plans exceeded
expectations in 2013, as they have done in four out of the last five years.
The funded status of the 100 largest corporate defined
benefit pension plans improved by $318 billion during 2013 as measured by the
PFI. The year ended on an optimistic note as the index captured four
consecutive months of funded status gains starting with September. Historically
low interest rates were the dominant factor in 2012, but interest rates have
since rebounded in 2013, increasing 87 basis points for the year and leading to
large liability declines. Higher-than-expected investment returns added to the
funded status improvement, as monthly returns were greater than expected in
nine out of 12 months during 2013. The funded ratio was 95.2% as of December
31, 2013, an astounding 18 percentage points higher than the 77.2% funded ratio
at the beginning of 2013. More than five years have elapsed since the PFI
funded ratio last exceeded 95%, when it settled at 99.4% in September 2008.
Many plan sponsors will now have their sights set on attaining fully funded
status for their plans in 2014.
During 2013, the cumulative investment return was 11.2%
while the cumulative liability return (i.e., the projected benefit obligation
decrease) was negative 7.4%. The discount rate for the December 2013 funded
status surged 87 basis points to 4.83% from 3.96% at the end of 2012, and the
median expected investment return for 2012 was 7.5%, as reported in the
Milliman 2013 Pension Funding Study.
The $318 billion funding improvement during 2013 resulted in
a year-end funded status deficit $72.9 billion, the smallest deficit at
year-end since year-end 2007, when the deficit was $68.0 billion. The gain in
funded status during 2013 resulted in a credit to corporate balance sheets at
the end of the 2013 fiscal year and is expected to produce an estimated
decrease of $33.5 billion in pension expense for 2014.
2013 began on a positive note with discount rates generally
rising and above average pension investment returns during the first quarter.
The funded ratio reached 82.8% at the end of March. Funded status reversed its
course during April as discount rates fell below 4%. Thereafter, the PFI funded
status resumed its assent as discount rates rose in spite of subpar investment
performance during the months of May and June. The funded ratio stood at 88.2%
at the mid-year mark. A strong second half propelled plans forward as
investment returns picked up again and interest rates inched forward some more.
The funded ratio broke new ground for the year at the end of September,
piercing above 91%. Finally, a strong fourth quarter of robust investment
performance and further interest rate climbs helped to close out the year on a
positive note as the funded ratio increased to 95.2%.
Pension plan accounting information disclosed in the
footnotes of the Milliman 100 companies’ annual reports for the 2013 fiscal
year is expected to be available during the first quarter of 2014 as part of
the 2014 Milliman 100 Pension Funding Study.
December 2013 review:
The funded status of the 100 largest corporate defined
benefit pension plans improved by $20 billion during December as measured by
the PFI. The deficit declined to $73 billion from $93 billion at the end of
November, due to strong asset returns and a slight rise in the benchmark
corporate bond interest rates used to value pension liabilities. The PFI funded
ratio increased to 95.2% from 93.9% at the end of November.
The projected benefit obligation (PBO), or pension
liabilities, decreased to $1.523 trillion from $1.533 trillion at the end of
November. This change was based on a five-basis-point increase in the monthly
discount rate to 4.83% for December, from 4.78% for November.
The market value of assets increased by $10 billion as a
result of December’s investment gain of 0.80%. The PFI asset value climbed to
$1.450 trillion, up from $1.440 trillion at the end of November. By comparison,
the 2013 Milliman Pension Funding Study reported that the monthly median
expected investment return during 2012 was 0.60% (7.5% annualized).
2014-2015 projections
If the Milliman 100 PFI companies were to achieve the
expected 7.5% (as per the 2013 pension funding study) median asset return for
their pension plan portfolios for the remainder of the projection period and
the current discount rate of 4.83% were maintained during years 2014 and 2015,
we forecast the funded status of the surveyed plans would increase. This would
result in a projected pension surplus of $14 billion (funded ratio of 100.9%)
by the end of 2014 and a projected pension surplus of $106 billion (funded
ratio of 106.8%) by the end of 2015. For purposes of this forecast, we have
assumed 2014 and 2015 aggregate contributions of $81 billion.
Under an optimistic forecast with rising interest rates
(reaching 5.43% by the end of 2014 and 6.03% by the end of 2015) and asset
gains (11.5% annual returns), the funded ratio would climb to 113% by the end
of 2014 and 134% by the end of 2015. Under a pessimistic forecast with similar
interest rate and asset movements (4.23% discount rate at the end of 2014 and
3.63% by the end of 2015 and 3.5% annual returns), the funded ratio would decline
to 89% by the end of 2014 and 84% by the end of 2015.
About the Milliman 100 Monthly Pension Funding Index:
For the past 13 years, Milliman has conducted an annual
study of the 100 largest defined benefit pension plans sponsored by U.S. public
companies. The Milliman 100 Pension Funding Index projects the funded status
for pension plans included in our study, reflecting the impact of market
returns and interest rate changes on pension funded status, utilizing the
actual reported asset values, liabilities, and asset allocations of the
companies’ pension plans.
The results of the Milliman 100 Pension Funding Index were
based on the actual pension plan accounting information disclosed in the
footnotes to the companies’ annual reports for the 2012 fiscal year and for
previous fiscal years. This pension plan accounting disclosure information was
summarized as part of the Milliman 2013 Pension Funding Study, which was
published on March 25, 2013. In addition to providing the financial information
on the funded status of U.S. qualified pension plans, the footnotes may also
include figures for the companies’ nonqualified and foreign plans, both of
which are often unfunded or subject to different funding standards than those
for U.S. qualified pension plans. They do not represent the funded status of
the companies’ U.S. qualified pension plans under ERISA.
Source: US.Millman.com
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