Milliman Reports October Drop in Pension Funding

Pension liabilities of the 100 largest corporate defined benefit pension plans increased by $43 billion in October while the assets backing those pension promises dropped by $2 billion, bringing the Milliman 100 PFI funded ratio to 72.6%, down from 74.5% at the end of September. The erosion in funded status follows funded status improvements in both August and September.

October’s funded status decline was primarily due to a decrease in the corporate bond interest rates that are the benchmarks used to value pension liabilities, Milliman said. The projected benefit obligation (PBO) increased to $1.821 trillion from $1.778 trillion at the end of September. A decrease of 12 basis points in the monthly discount rate—to 3.96% in October from 4.08% for September—drove the liability increase.

The Milliman 100 PFI asset value decreased to $1.322 trillion from $1.324 trillion at the end of September. The decrease was due to October’s investment loss of 0.01%. By comparison, the Milliman 2012 Pension Funding Study published in March 2012 reported that the monthly median expected investment return during 2011 was 0.63% (7.80% annualized).

In the 12-month-period ending October 31, Milliman 100 plans have experienced a cumulative investment gain of 10.5% while, unfortunately, experiencing a total funded status decrease of $206 billion. In that same time, the funded ratio of the Milliman 100 companies dropped to 72.6% from 80.9%, mostly because of declining discount rates.

Milliman projects that if the Milliman 100 PFI companies were to achieve a 7.8% median asset return (per the 2012 pension funding study) expected for their pension plan portfolios and the current discount rate of 3.96% were to be maintained from 2012 through 2013, the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $489 billion (funded ratio of 73.2%) by the end of 2012 and a projected pension deficit of $413 billion (funded ratio of 77.6%) by the end of 2013. For purposes of this forecast, Milliman assumed 2012 aggregate contributions of $67 billion and 2013 aggregate contributions of $81 billion.

The expected loss in funded status during 2012 (more than $150 billion) will result in a charge to corporate balance sheets at the end of the 2012 fiscal year. The expected loss will produce an estimated increase of more than $17 billion in pension expense for the 2013 fiscal year.

The contribution assumptions have not been adjusted to reflect the potential impact of the Moving Ahead for Progress in the 21st Century Act (MAP-21), which includes pension funding stabilization provisions. Milliman feels the majority of Milliman 100 companies will continue to prudently fund the pension deficits in their respective plans and presumably continue with their existing pension de-risking funding strategies rather than lower their contribution level to satisfy minimum standards.

Under an optimistic forecast with rising interest rates (reaching 4.06% by the end of 2012 and 4.66% by the end of 2013) and asset gains (11.8% annual returns), the funded ratio would climb to 75% by the end of 2012 and 92% by the end of 2013. Under a pessimistic forecast with similar interest rate and asset movements (3.26% discount rate at the end of 2012 and 3.86% by the end of 2013 and 3.8% annual returns), the funded ratio would decline to 71% by the end of 2012 and 65% by the end of 2013.

The complete pension funding index is here.