Funded status declines slightly to 83.3% as a result of
meager investment gain and unchanged interest rates. All eyes are on Fed policy
and the bond market as the December 31 measurement date nears. Rates are up 32
basis points this year. Will December include a rate hike as well?
The funded status of the 100 largest corporate defined
benefit pension plans fell by $3 billion during November, as measured by the
Milliman 100 Pension Funding Index (PFI). The deficit widened to $286 billion
due to flat investment performance of the assets of the Milliman 100 companies
during November. Interest rates did not change at all in November, and there
was no corresponding liability change. As of November 30, the funded ratio
slipped back to 83.3%, from 83.5% at the end of October.
The market value of assets dropped by $3 billion as a
result of November’s microscopic investment gain of 0.16%. This is coming off
October, which boasted the highest monthly return for 2015 of 2.97%. The
Milliman 100 PFI asset value dropped to $1.429 trillion from $1.432 trillion at
the end of October. By comparison, the 2015 Milliman Pension Funding Study
reported that the monthly median expected investment return during 2014 was
0.59% (7.3% annualized).
The Milliman 100 PFI projected benefit obligation (PBO),
or pension liabilities, remained at $1.716 trillion, recording no change during
November. This was due to static November benchmark corporate bond interest
rates used to value liabilities. The discount rate remained steady at 4.16% for
November, unchanged from October.
Over the last 12 months (Dec 2014 – Nov 2015), the
cumulative asset return for these pensions has been 2.13% and the Milliman 100
PFI funded status deficit has improved by $17 billion. The rise in funded
status over the past 12 months is primarily due to the small uptick in discount
rates. This rise has helped to offset the funded status losses caused by poor
investment returns. The funded ratio of the Milliman 100 companies has inched
upward over the past 12 months to 83.3% from 82.8%.
2015-2017 Projections
If the Milliman 100 PFI companies were to achieve the
expected 7.3% (as per the 2015 pension funding study) median asset return for
their pension plan portfolios, and the current discount rate of 4.16% was
maintained during years 2015 through 2017, we forecast the funded status of the
surveyed plans would increase. This would result in a projected pension deficit
of $248 billion (funded ratio of 85.6%) by the end of 2016 and a projected
pension deficit of $208 billion (funded ratio of 88.0%) by the end of 2017. For
purposes of this forecast, we have assumed 2015 aggregate contributions of $32
billion, 2016 aggregate contributions of $36 billion, and 2017 aggregate
contributions of $39 billion.
Under an optimistic forecast with rising interest rates
(reaching 4.81% by the end of 2016 and 5.41% by the end of 2017) and asset
gains (11.3% annual returns), the funded ratio would climb to 97% by the end of
2016 and 111% by the end of 2017.
Under a pessimistic forecast with similar interest rate
and asset movements (3.51% discount rate at the end of 2016 and 2.91% by the
end of 2017 and 3.3% annual returns), the funded ratio would decline to 75% by
the end of 2016 and 69% by the end of 2017.
Source: Milliman US
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