Milliman 100 PFI funded ratio ends at 82.7% in 2015
compared to 81.5% at end of 2014. Discount rate settles at 4.22%, up 38 basis
points during 2015. Forecast for end of year 2016 and 2017.
Year in review
Based on a review of interest rate activity over the last
six years ending with 2014, an increase in the net interest rate for the year
has occurred just once. The year 2015, like 2013, changes the history to two
years in the last seven years in which interest rates increased, resulting in
lower pension liabilities. The Milliman 100 discount rate climbed 38 basis
points to 4.22% at the end of 2015, from 3.84% at the end of 2014.
While 2012, 2013, and 2014 resulted in asset returns
above expectations, 2015 asset performance was dismal: investment return was
1.15% for the year, well under the annual asset return expectation of 7.3%.
The result was a funded status improvement of $35 billion
at the end of 2015 when compared to the end of 2014. The year-end 2015 funded
ratio was 82.7%, up from 81.5% at the end of 2014. But the 2015 funded ratio
still trails the year-end high point over the last seven years of 88.3% at the
end of 2013.
The funded status increased by $35 billion during 2015
for the 100 largest corporate defined benefit pension plans, as measured by the
Milliman 100 Pension Funding Index (PFI). Higher interest rates were the dominant
factor in the funded status improvement. While lower-than-expected investment
returns produced a $45 billion loss, pension liabilities decreased by $80
billion.
The projected asset and liability figures presented in
this analysis will be adjusted as part of Milliman’s annual 2016 Pension
Funding Study. The study will also adjust for pension settlement and annuity
purchase activities that occurred during 2015. 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.
During 2015, the cumulative investment return was 1.15%,
while the cumulative liability return (i.e., the projected benefit obligation
(PBO) decrease) was 0.98%. The $35 billion funded status improvement during
2015 resulted in a year-end funded status deficit of $294 billion. Despite the
gain in funded status during 2015, pension expense for 2016 is estimated to
increase by $6 billion, primarily due to the asset losses experienced during
2015.
The year 2015 got off to a poor start as interest rates
dropped 43 basis points in January 2015, resulting in the funded ratio hitting
its low point for the year at 77.5%. The activity during the remainder of the
first quarter of 2015 was largely positive, with strong asset performance
boosting the funded ratio to 80.9% as of March 31, 2015. In spite of poor asset
performance in June, the second quarter of 2015 was largely optimistic given
that interest rates rose 60 basis points during this period. The funded ratio
at the end of June 2015 was 85.5%, its peak for 2015. From there, funded status
deterioration set in, with dismal asset returns being recorded during the third
quarter of 2015. As of September 30, asset returns were already negative for the
year, and the funded ratio had declined to 81.7%. The fourth quarter provided
some improvement, primarily due to strong investment returns in October, which
turned out to be the best month of the year with returns of 2.97%. Interest
rates were mainly flat in the fourth quarter, and the funded ratio ended the
year slightly up at 82.7%.
Rumors were rampant in the fourth quarter of a looming
rate hike by the Federal Reserve and were realized with a small 25 basis point
rate hike in December. But by the time of the announcements, major markets had
already reflected the action. Hence, discount rates for pensions only increased
by six basis points in December. The action by the Fed primarily affected
liabilities at the short end (low duration) of the yield curve and did not have
much effect beyond that. Of course if interest rates continue their upward path
during 2016, the funded ratio could make some major gains. More information on
this is provided in the 2016-2017 projections discussion below.
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.
December review
The funded status decreased by $7 billion during
December. The deficit increased to $294 billion from a deficit of $287 billion
at the end of November. The funded status drop for the month of December was
due to negative investment returns of 0.93%. The decrease in pension assets was
offset by the decrease in pension liabilities based on a small increase in
corporate bond interest rates that are the benchmarks used to value pension
liabilities. As of December 31, the funded ratio decreased to 82.7% from 83.3%
at the end of November.
December’s $18 billion decrease in market value brings
the Milliman 100 PFI asset value to $1.410 trillion at year-end 2015. The PBO,
or pension liabilities, decreased by $11 billion during December, lowering the
Milliman 100 PFI value to $1.705 trillion from $1.716 trillion at the end of
November 2015. The change resulted from an increase of six basis points in the
monthly discount rate to 4.22% for December from 4.16% for November.
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 4.22% was
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 $260 billion (funded ratio of 84.8%) by the end of 2016 and a projected
pension deficit of $221 billion (funded ratio of 87.1%) 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 4.82% by the end of 2016 and 5.42% by the end of 2017) and asset
gains (11.3% annual returns), the funded ratio would climb to 95% by the end of
2016 and 109% by the end of 2017. Under a pessimistic forecast with similar
interest rate and asset movements (3.62% discount rate at the end of 2016 and
3.02% 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.
About the Milliman 100 Monthly Pension Funding Index
For the past 15 years, Milliman has conducted an annual
study of the 100 largest defined benefit pension plans sponsored by U.S. public
companies. The Milliman 100 Pension Funding Index projects the funded status
for pension plans included in our study, reflecting the impact of market
returns and interest rate changes on pension funded status, utilizing the
actual reported asset values, liabilities, and asset allocations of the
companies’ pension plans.
The results of the Milliman 100 Pension Funding Index
were based on the actual pension plan accounting information disclosed in the
footnotes to the companies’ annual reports for the 2014 fiscal year and for
previous fiscal years. This pension plan accounting disclosure information was
summarized as part of the Milliman 2015 Pension Funding Study, which was
published on April 2, 2015. In addition to providing the financial information
on the funded status of U.S. qualified pension plans, the footnotes may also
include figures for the companies’ nonqualified and foreign plans, both of
which are often unfunded or subject to different funding standards than those
for U.S. qualified pension plans. They do not represent the funded status of
the companies’ U.S. qualified pension plans under ERISA.
Source: Milliman US
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