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.