The funded status of the
100 largest corporate defined benefit pension plans rose to 94.5% during
September from 93.3% at the end of August, its highest level in a decade,
according to consulting firm Milliman.
The latest data
from the Milliman 100 Pension Funding Index (PFI) shows that the pension plans
experienced a $21 billion increase in funding as a result of an increase in the
benchmark corporate bond interest rates used to value pension liabilities.
The last time
the Milliman 100 funding ratio was higher than it is now was just before the
financial crisis when the funded ratio was 99.4%.
“September’s
funded ratio marks a 10-year high and is the closest these plans have been to
being fully funded since September 2008,” Zorast Wadia, co-author of the
Milliman PFI, said in a release. “But the improvement is overshadowed by the
market losses experienced over the past couple days, which could very well lead
to a reversal of these funding gains.”
From the end of
August to the end of September, the monthly discount rate rose 13 basis points
to 4.18% from 4.05%, causing the projected benefit obligation (PBO) for the
plans to fall by $27 billion. However, this was offset by a $6 billion decrease
from investment losses.
The market
value of assets declined by $6 billion as a result of September’s 0.14%
investment loss to $1.540 trillion, from $1.546 trillion at the end of August.
By comparison, the 2018 Milliman Pension Funding Study reported that the
monthly median expected investment return during 2017 was 0.55%, which is 6.8%
on an annualized basis.
Meanwhile, the
funded status deficit improved by $31 billion, which was attributed to
above-average investment returns and interest rate gains during the quarter.
Asset gained 1.92% in the third quarter and discounts rates increased by six
basis points. The funded ratio of the Milliman 100 companies was 92.7% at the
end of the second quarter.
Milliman said
that under an optimistic forecast, which would see interest rates rise to 4.33%
by the end of 2018, and 4.93% by the end of 2019, with 10.8% annual returns on
assets, the funded ratio would climb to 98% by the end of 2018 and 114% by the
end of 2019. But under a pessimistic forecast, with a 4.03% discount rate
at the end of 2018, and 3.43% by the end of 2019, with 2.8% annual returns, the
funded ratio would decline to 93% by the end of 2018, and 85% by the end of
2019.
According to
Milliman, corporate plan sponsors contributed $62 billion to their plans in
fiscal year 2017, bringing the year’s total assets to a record $1.55 trillion.
That was 45% more than the $42.6 billion contributed in 2016, with 17 of the
employers contributing at least $1 billion, and seven contributing more than $2
billion.
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