Milliman Analysis: Funded status deficit increases by $35 billion in February, has ballooned by $68 billion so far in 2016: index Drops Below 80% funded

Milliman 100 PFI funded ratio falls below 80% for the first time in the last 12 months to 79.1%

The funded status of the 100 largest corporate defined benefit pension plans dropped by $35 billion during February as measured by the Milliman 100 Pension Funding Index (PFI). The funded status deficit widened to $364 billion from $329 billion at the end of January, primarily due to the drop in the benchmark corporate bond interest rates used to value pension liabilities. Adding to the funded status deficit was February’s investment losses. As of February 29, the funded ratio dropped to 79.1%, down from 80.8% at the end of January.

 

The market value of assets fell by $5 billion as a result of February’s investment loss of 0.02%. The Milliman 100 PFI asset value decreased to $1.376 trillion from $1.381 trillion at the end of January. 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 expected rate of return for 2015 will be updated in the 2016 Milliman Pension Funding Study, due out later in the first quarter of 2016.

The projected benefit obligation (PBO), or pension liabilities, increased to $1.740 trillion at the end of February. The change resulted from a decrease of 13 basis points in the monthly discount rate to 4.06% for February from 4.19% for January.

Over the last 12 months (March 2015 – February 2016), the cumulative asset return for these pensions has been -3.27% and the Milliman 100 PFI funded status deficit has worsened by $20 billion. The funded ratio of the Milliman 100 companies has decreased over the past 12 months to 79.1% from 81.2%.

The projected asset and liability figures presented in this analysis will be adjusted as part of our annual 2016 Pension Funding Study where pension settlement and annuity purchase activities that occurred during 2015 will be reflected. De-risking transactions generally result in reductions in pension funded status since 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.

Pension plan accounting information disclosed in the footnotes of the Milliman 100 companies’ annual reports for the 2015 fiscal year is expected to be available during the first quarter of 2016 as part of the 2016 Milliman Pension Funding Study.

2016-2017 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 4.06% were maintained during years 2016 and 2017, we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $338 billion (funded ratio of 80.7%) by the end of 2016 and a projected pension deficit of $302 billion (funded ratio of 82.8%) by the end of 2017. For purposes of this forecast, we have assumed 2016 aggregate contributions of $36 billion and 2017 aggregate contributions of $39 billion.

Under an optimistic forecast with rising interest rates (reaching 4.56% by the end of 2016 and 5.16% by the end of 2017) and asset gains (11.3% annual returns), the funded ratio would climb to 89% by the end of 2016 and 102% by the end of 2017. Under a pessimistic forecast with similar interest rate and asset movements (3.56% discount rate at the end of 2016 and 2.96% by the end of 2017 and 3.3% annual returns), the funded ratio would decline to 73% by the end of 2016 and 66% by the end of 2017.

Source: MIlliman US