Pension plans begin 2012 by narrowing a record deficit

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans. In January, these pensions experienced a $30 billion improvement in pension funding based entirely on asset performance, leaving the pension funding deficit at $434 billion and increasing the funded ratio from 72.4% to 74.2%. The strong month follows a lost year in which interest rates drove the pension funding deficit to historic levels.

Interest rates actually cooperated this month—or at least they didn’t go down. The lack of interest rate movement allowed these pensions to take advantage of a 2.49% investment gain for the month and recoup some of the funding loss that characterized 2011. With the Federal Reserve committing to low rates through the end of 2014, we’re going to need more months like this if we are going to fill the pension funding gap.

In January, the projected benefit obligation (PBO) for these pensions remained static at $1.685 trillion as interest rates moved from 4.25% to 4.26%. The strong month for assets left the year-to-date asset value at $1.251 trillion.

Looking forward, if these 100 pensions were to achieve an 8.0% median asset return and if the current discount rate of 4.26% were to be maintained throughout 2012 and 2013, these pensions would narrow the pension funding gap from 74.2% to 79.0% by the end of 2012 and to 84.4% by the end of 2013.

About John Ehrhardt

John is a principal and consulting actuary in the New York office of Milliman. He joined the firm in 1983. John is the author of Milliman’s annual Pension Funding Survey and the Milliman 100 Pension Funding Index, which analyze the funded status of the pension plans of 100 of the largest U.S. corporations.

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