Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In June, these pensions experienced a $1 billion increase in funded status, as superior asset growth was able to offset rising pension liabilities due to a decrease in the benchmark corporate bond interest rates used to value those liabilities.
June’s solid 2.82% investment return raised the Milliman 100 PFI asset value by $38 billion, which more than made up for investment losses experienced in May and continues the upward march of asset returns seen during most of 2019. However, with the monthly discount rate falling to 3.45%, the lowest it’s been in nearly three years, PFI liabilities increased as well, by $37 million. As a result, the Milliman 100 PFI funding changed only incrementally: the funded ratio inched up from 87.7% at the end of May to 88.0% as of June 30.
The low discount-rate environment—the likes of which we haven’t seen since September 2016—would spell a lot more trouble for corporate pensions if it weren’t for 2019’s overall asset gains. In fact, three years ago the PFI deficit was nearly double what it is today. Investment returns for 2019 have exceeded expectations in every month of the year except May; if discount rates increase in the second half of the year, this could be a truly favorable year for corporate pensions.
Looking forward, under an optimistic forecast with rising interest rates (reaching 3.75% by the end of 2019 and 4.35% by the end of 2020) and asset gains (10.6% annual returns), the funded ratio would climb to 95% by the end of 2019 and 111% by the end of 2020. Under a pessimistic forecast (3.15% discount rate at the end of 2019 and 2.55% by the end of 2020 and 2.6% annual returns), the funded ratio would decline to 85% by the end of 2019 and 78% by the end of 2020.
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