Funded status of top corporate plans jumps slightly in April

April was a better month for the 100 largest U.S. corporate pension plans, with their funded status rising to 82.6% from 80.9%.

“Someone once said April is the cruelest month, but for these pensions last month was less cruel than what happened over the course of the first quarter,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index. “We’re still a long ways away from full funded status, but the slight rise in interest rates at least moved things in the right direction to start the second quarter of 2015.”

In April, these pensions saw a $40 billion increase in funded status based on a $2 billion decrease in asset values and a $42 billion decrease in pension liabilities. The projected benefit obligation, or what these pensions are expected to pay out to participants, decreased in April lowering the Milliman 100 PFI value to $1.791 trillion.

“The change resulted from an increase of 17 basis points in the monthly discount rate to 3.82% for April from 3.65% for March. That makes it six consecutive months with historically low sub-4.00% discount rates,” Milliman said in its report.

Over the past 12 months, the cumulative asset return for these pensions was 9.64% and the the Milliman 100 PFI funded status deficit has worsened by $41 billion.

If interest rates continue to rise, these corporate plans could be fully funded by 2016, Milliman projected. It would take interest rates reaching 4.22% by the end of 2015 and 4.82% by the end of 2016 to make that happen, Milliman said. It would also take 11.3% annual returns on assets to get the funded ratio to jump from its current 82.6% to 91% by the end of 2015 and 105% by the end of 2016.

Milliman’s pessimistic forecast would see a 3.42% discount rate at the end of 2015 and 2.82% by the end of 2016 with a funded ratio of 78% in 2015 and 70% by the end of 2016.

According to its report, Milliman believes that if these 100 companies achieve a 7.3% median asset return for their pension portfolios and the current discount rate of 3.82% is maintained throughout the next two years, the funded status of the plans would increase.

“This would result in a projected pension deficit of $286 billion (funded ratio of 84.1%) by the end of 2015 and a projected pension deficit of $244 billion (funded ratio of 86.4%) by the end of 2016,” Milliman said.

Milliman has been studying the 100 largest defined benefit plans for the past 15 years to come up with its pension index. The information is pulled from actual pension plan accounting information disclosed in the companies’ annual reports.

Source: Employee Benefit News