The Milliman 100 PFI funded status worsens to $268 billion due to an increase in pension liabilities.
The funded status deficit of the 100 largest corporate
defined benefit pension plans increased by $10 billion during May as measured
by the Milliman 100 Pension Funding Index (PFI). The $268 billion deficit at
the end of May is primarily due to a drop in the benchmark corporate bond
interest rates used to value pension liabilities. Investment gains helped to
partially offset the full extent of liability increases in May. As of May 31,
the funded ratio fell to 84.3%, down from 84.7% at the end of April.
May’s funded status decline was quite similar to that in April, with lower interest rates increasing liabilities to a level that could not be offset by rising assets. May was the fifth consecutive month of interest rate decreases. Fortunately, the strong year-to-date asset performance has mitigated further erosion.
The projected benefit obligation (PBO), or pension
liabilities, increased by $29 billion during May, raising the Milliman 100 PFI
value to $1.715 trillion. The PBO change resulted from a decrease of 14 basis
points in the monthly discount rate to 4.06% for May, from 4.20% for April. The
last time the discount rate was this low was April 2013, when it stood at
3.98%.
The market value of assets increased by $19 billion as a
result of May’s robust investment gain of 1.61%. The Milliman 100 PFI asset
value increased to $1.446 trillion, up from $1.427 trillion at the end of
April. By comparison, the 2014 Milliman Pension Funding Study reported that the
monthly median expected investment return during 2013 was 0.60% (7.4%
annualized).
Over the last 12 months (June 2013 to May 2014), the
cumulative asset return for these pensions has been 10.54%, but the Milliman
100 PFI funded status deficit has improved by $5 billion. In spite of the
strong asset performance, the funded status has not shown a great improvement
over the past 12 months due to decreasing interest rates. Although discount
rates rose during most of 2013, they have taken a downward turn for all of
2014. Since May 31, 2013, the discount rate has dropped 35 basis points to
4.06% from 4.41%. The funded ratio of the Milliman 100 companies has increased
over the past 12 months to 84.3% from 83.3%.
2014-2015 projections
If the Milliman 100 PFI companies were to achieve the
expected 7.4% (as per the 2014 Milliman Pension Funding Study) median asset
return for their pension plan portfolios and the current discount rate of 4.06%
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
deficit of $241 billion(funded ratio of 86.0%) by the end of 2014 and a
projected pension deficit of $187 billion (funded ratio of 89.2%) by the end of
2015. For purposes of this forecast, we have assumed 2014 aggregate contributions
of $44 billion and 2015 aggregate contributions of $48 billion.
Under an optimistic forecast with rising interest rates
(reaching 4.41% by the end of 2014 and 5.01% by the end of 2015) and asset
gains (11.4% annual returns), the funded ratio would climb to 92% by the end of
2014 and 106% by the end of 2015. Under a pessimistic forecast with similar
interest rate and asset movements (3.71% discount rate at the end of 2014 and
3.11% by the end of 2015 and 3.4% annual returns), the funded ratio would decline
to 80% by the end of 2014 and 74% by the end of 2015.
See the entire report and data charts here…
Source: US.Milliman
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