Pension funding ratio declines to 91.2% at the end of
January.
The funded status of the 100 largest corporate defined
benefit pension plans dropped by $67 billion during January, as measured by the
Milliman 100 Pension Funding Index. The deficit declined to $140 billion from
$73 billion at the end of December 2013, primarily due to a 28-basis-point drop
in the benchmark corporate bond interest rates used to value pension
liabilities. Pension assets also experienced a modest loss during January,
contributing to the funded status deficit. As of January 31, the funded ratio
decreased to 91.2%, down from 95.2% at the end of December 2013.
The projected benefit obligation (PBO), or pension
liabilities, increased to $1.583 trillion from $1.523 trillion at the end of
December 2013. The 28-basis-point decrease in the monthly discount rate to
4.55% for January, from 4.83% for December 2013, was the cause. An interest
rate decline of this magnitude was not experienced during any of the months of
2013, when interest rates primarily trended upward.
The market value of assets decreased by $7 billion as a
result of January’s investment loss of -0.44%. This comes after a stellar
investment performance year in 2013 where annual returns exceeded 11%. The loss
on the assets was protected from the broad equity market decline of more than
3.0% because of the diversity of the plan assets. The Milliman 100 PFI asset
value declined to $1.443 trillion, down from $1.450 trillion at the end of
December 2013. By comparison, the Milliman 2013 Pension Funding Study reported
that the monthly median expected investment return during 2012 was 0.60% (7.5%
annualized). The expected rate of return for 2013 will be updated in the
Milliman 2014 Pension Funding Study, due out by April 2014.
Over the last 12 months (February 2013 to January 2014), the
cumulative asset return for these pensions has been 8.96% and the Milliman 100
PFI funded status deficit has improved by $169 billion. The reasons for the
amelioration in funded status were the higher trending interest rates and
above-expected asset returns seen during most of 2013. The funded ratio of the
Milliman 100 companies has increased over the past 12 months to 91.2% from
81.3%.
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 4.55% were maintained during years 2014 and 2015,
we forecast that the funded status of the surveyed plans would increase. This
would result in a projected pension deficit of $62 billion (funded ratio of
96.1%) by the end of 2014 and a projected pension surplus of $29 billion
(funded ratio of 101.8%) 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 5.10% by the end of 2014 and 5.70% by the end of 2015) and asset gains
(11.5% annual returns), the funded ratio would climb to 107% by the end of 2014
and 127% by the end of 2015. Under a pessimistic forecast with similar interest
rate and asset movements (4.00% discount rate at the end of 2014 and 3.40% by
the end of 2015 and 3.5% annual returns), the funded ratio would decline to 86%
by the end of 2014 and 80% 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: Milliman.com
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