Corporate pension gains evaporate in May

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 May, these pensions experienced a $90 billion decrease in pension funded status based on a $60 billion increase in the pension benefit obligation (PBO) and a $30 billion decline in asset value. The $90 billion decrease in funded status pairs with last month’s $39 billion decrease, depriving these pensions of all year-to-date gains.

The promising start to 2012 has been undercut by the same factors that have plagued these pensions for several years now: Plummeting discount rates and volatile asset returns. It’s worth noting, however, that it could have been worse. Our year-end Pension Funding Study showed an unprecedented move toward fixed income, and that movement helped counteract the worst single-month equity market we’ve seen since last September. May’s $30 billion decrease in asset value would have totaled $49 billion had these pensions been using the typical 60% stocks/40% fixed income approach that had been the status quo until last year.

In May, the discount rate used to calculate pension liabilities fell from 4.76% to 4.56%, pushing the PBO up to $1.621 trillion at the end of the month. The overall asset value for these 100 pensions decreased from $1.294 trillion to $1.264 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.56% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funded ratio from 78.0% to 80.2% by the end of 2012 and to 84.9% 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.

Leave a Reply