The funded status of the 100 largest corporate defined
benefit pension plans dropped by $90 billion during January as measured by the
Milliman 100 Pension Funding Index (PFI). The $90 billion funded status decline
was the eighth largest monthly drop in the 15-year history of the Milliman 100
PFI. The funded status deficit ballooned to $382 billion from $292 billion at
the end of December 2014 due to the 42 basis point decline in the benchmark
corporate bond interest rates used to value pension liabilities. Pension assets
had a monthly above-expected return due to strong fixed income asset return and
this helped to counter liability losses. As of January 31, the funded ratio
decreased to 79.6%, down from 83.5% at the end of December 2014. The previous
sub-80% PFI funded ratio was in December 2012.
The projected benefit obligation (PBO), or pension
liabilities, increased to $1.876 trillion from $1.775 trillion at the end of
December 2014. The change resulted from a decrease of 42 basis points in the
monthly discount rate to 3.38% for January from 3.80% for December 2014.
January’s discount rate is the lowest in the history of the Milliman 100 PFI.
The last time we observed a comparable discount rate
change was in July 2012 when discount rates fell 40 basis points ending at
3.92%. January’s precipitous drop is even more impactful.
The market value of assets increased by $11 billion as a
result of January’s investment return of 1.07%. The Milliman 100 PFI asset
value rose to $1.493 trillion. By comparison, the 2014 Milliman Pension Funding
Study reported that the monthly median expected investment return during 2013
was 0.60% (7.4% annualized).
The expected rate of return for 2014 will be updated in
the 2015 Milliman Pension Funding Study due out later in the first quarter of
2015.
Over the last 12 months (February 2014 – January 2015),
the cumulative asset return for these pensions has been 11.04%, but the
Milliman 100 PFI funded status deficit has deteriorated by $135 billion. The
reason for the drop in funded status in spite of asset returns above
expectations was the declining interest rates experienced during most of 2014.
The funded ratio of the Milliman 100 companies has decreased over the past 12
months to 79.6% from 84.9%.
December 31 pension disclosures are expected to reflect
adoption by many plan sponsors of new mortality assumptions which generally
reflect increases in life expectancy, resulting in higher pension liabilities.
The magnitude of these increases depends on the age, gender, and composition of
annuitants and non-annuitants by individual pension plan. The February Milliman
100 PFI has not been adjusted to estimate the increase in PBO to reflect the mortality
tables finalized by the Society of Actuaries last October. However, our
preliminary analysis of the impact indicates an estimated increase of 6% to 8%
in pension liabilities. This would imply a PBO increase of up to $151 billion
and would decrease the funded ratio by over six percentage points, bringing it
73.6%, a funding level last seen in October 2012.
Additionally, the projected asset and liability figures
presented in this analysis will be adjusted as part of our annual 2015 Pension
Funding Study where pension settlement and annuity purchase activities that
occurred during 2014 will be reflected. De-risking transactions generally
result in reductions in pension funded status because the assets paid to the
participants or assumed by the insurance companies as part of the risk transfer
are larger than the corresponding liabilities that are extinguished from the
balance sheets. To offset this decrease effect, many companies engaging in
de-risking transactions make additional cash contributions to their pension
plans to improve the plan’s funded status.
If low discount rates are sustained, the only two ways
for the funded status to improve are by exceptional investment returns and
higher cash contributions by plan sponsors, the latter of which is expected to
remain relatively low given the contribution funding relief implemented by the
Highway and Transportation Funding Act, passed in August 2014. Pension plan
accounting information disclosed in the footnotes of the Milliman 100
companies’ annual reports for the 2014 fiscal year is expected to be available
during the first quarter of 2015 as part of the 2015 Milliman Pension Funding
Study.
2015-2016
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 3.38%
was maintained during years 2015 and 2016, we forecast that the funded status
of the surveyed plans would increase. This would result in a projected pension
deficit of $347 billion (funded ratio of 81.5%) by the end of 2015 and a
projected pension deficit of $308 billion (funded ratio of 83.7%) by the end of
2016. For purposes of this forecast, we have assumed 2014 aggregate
contributions of $44 billion and 2015 and 2016 aggregate contributions of $31
billion.
Under an optimistic forecast with rising interest rates
(reaching 3.93% by the end of 2015 and 4.53% by the end of 2016) and asset
gains (11.4% annual returns), the funded ratio would climb to 91% by the end of
2015 and 104% by the end of 2016. Under a pessimistic forecast with similar
interest rate and asset movements (2.83% discount rate at the end of 2015 and
2.23% by the end of 2016 and 3.4% annual returns), the funded ratio would
decline to 73% by the end of 2015 and 66% by the end of 2016.
Source: MilimanUS
No comments:
Post a Comment