July’s corporate pension funding deficit largest seen in 2019 as discount rates drop

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In July, the Milliman 100 PFI deficit hit a year-to-date high, swelling from $205 billion to $216 billion, the result of a decrease in the benchmark corporate bond interest rates used to value pension liabilities. The monthly discount rate during July dropped by eight basis points, to 3.37%, making it the third-lowest discount rate in the 19-year history of the Milliman 100 Pension Funding Index, with discount rates lower only in July and August of 2016 .

July delivered a one-two punch to corporate pensions, with the Federal Reserve’s quarter-point interest rate cut and drop in the monthly discount rate. Investment returns overall this year have helped buoy funding—but with the market volatility seen over the past few days, August may turn out to be more “bust” than “boom” for these pensions.

As of July 31, the funded ratio of the Milliman 100 PFI fell from 88.4% to 87.9%, and the funded status of these pensions decreased by $11 billion. Over the last 12 months (August 2018 to July 2019), the cumulative asset return for these pensions has been 6.42%, while discount rates experienced a 74 basis point drop, moving from 4.11% to 3.37% a year later.  Looking forward, under an optimistic forecast with rising interest rates (reaching 3.62% by the end of 2019 and 4.22% by the end of 2020) and asset gains (10.6% annual returns), the funded ratio would climb to 94% by the end of 2019 and 109% by the end of 2020.  Under a pessimistic forecast (3.12% discount rate at the end of 2019 and 2.52% 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.

To view the complete Pension Funding Index, click here. To see the 2019 Milliman Pension Funding Study, click here.

To receive regular updates of Milliman’s pension funding analysis, contact us here.

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