Blistering 1.92%
investment gain adds $24 billion to the asset total, but it is not enough to
offset a $46 billion increase in liabilities, raising the Milliman 100 PFI
funded status deficit to $281 billion
The funded status of the 100 largest corporate defined
benefit pension plans deteriorated by $22 billion during August as measured by
the Milliman 100 Pension Funding Index (PFI). The deficit increased to $281
billion from $259 billion at the end of July, due to a drop in the benchmark
corporate bond interest rates used to value pension liabilities. August’s
robust investment gain was not enough to improve the Milliman 100 PFI’s funded
status. As of August 31, the funded ratio dropped to 84.0%, down from 84.8% at
the end of July.
The projected benefit obligation (PBO), or pension
liabilities, increased by $46 billion during August, raising the Milliman 100
PFI value to $1.754 trillion from $1.708 trillion at the end of July. The PBO
change resulted from a decrease of 21 basis points in the monthly discount rate
to 3.89% for August, from 4.10% for July. The August 31 discount rate of 3.89%
is the lowest ever recorded in the 14-year history of the Milliman 100 PFI.
Discount rates have decreased by 79 basis points during
the first eight months of 2014, resulting in a liability increase of $165
billion. This decrease completely erases the interest rate increase of 72 basis
points that occurred in calendar year 2013. Fortunately, the strong
year-to-date asset performance has mitigated deeper funded status erosion.
The market value of assets increased by $24 billion as a
result of August’s investment gain of 1.92%. The Milliman 100 PFI asset value
increased to $1.473 trillion, up from $1.449 trillion at the end of July. 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 ( September 2013 to August 2014),
the cumulative asset return for these pensions has been 14% but the Milliman
100 PFI funded status deficit has worsened by $44 billion. The drop in funded
status over the past 12 months is primarily due to the decline in interest
rates. Since August 31, 2013, the discount rate has dropped 88 basis points, to
3.89% from 4.77%. The funded ratio of the Milliman 100 companies has decreased
over the past 12 months, to 84.0% from 84.9%.
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 3.89%
were maintained during 2014 and 2015, we forecast that the funded status of the
surveyed plans would increase. This would result in a projected pension deficit
of $265 billion (funded ratio of 84.9%) by the end of 2014 and a projected
pension deficit of $228 billion (funded ratio of 87.1%) by the end of 2015.
For purposes of this forecast, we have assumed 2014
aggregate contributions of $44 billion and 2015 aggregate contributions of $31
billion. The drop in contribution expectations for 2015 is reflective of the
passage of the Highway and Transportation Funding Act of 2014 (HATFA), which
was signed into law on August 8 and extended the MAP-21 interest-rate relief
provisions for defined benefit plan sponsors. While we expect many of the
Milliman 100 companies to make contributions above the minimum requirements, we
also expect some plan sponsors who are cash strapped to take advantage of the
available contribution relief.
Under an optimistic forecast with rising interest rates
(reaching 4.09% by the end of 2014 and 4.69% by the end of 2015) and asset
gains (11.4% annual returns), the funded ratio would climb to 88% by the end of
2014 and 101% by the end of 2015. Under a pessimistic forecast with similar
interest rate and asset movements (3.69% discount rate at the end of 2014 and
3.09% by the end of 2015 and 3.4% annual returns), the funded ratio would
decline to 82% by the end of 2014 and 75% by the end of 2015.
For access to the remainder of this article and data rich
graphs, go here…
Follow the link for a downloadable PDF version of the Milliman
September, 2014 Report.
Follow the link for a downloadable PDF version of the
complete Milliman
2014 Pension Funding Study
Source: US.Milliman
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