Exploring funded status volatility of defined benefit plans

The funded status of corporate defined benefit (DB) pension plans has experienced unprecedented volatility in the 21st century.  Numerous pension de-risking techniques are available for plan sponsors to use depending on their risk exposure and risk tolerance. Risk management, by definition, can be a risky business.

When Milliman established the Pension Funding Index in 1999, DB plans were generally in surplus positions. This observed surplus continued through the end of 2001. However, the Milliman 100 pension plans recorded a funded status deficit of $16 billion by early 2002 in the wake of the dot-com crash and the terrorist attacks of Sept. 11, 2001 (9/11).

The ensuing period of deficit lasted until 2006 with the funded status deficit reaching $36 billion. An all too brief economic and funded-status recovery followed with the funded status surplus reaching $3 billion in 2008. This period of surplus was short-lived as the Milliman 100 plans began their second distinct period of deficit positions in 2008, during the time of the worldwide global financial crisis, with the funded status deficit starting out at $7 billion. Those deficits have continued through the recession and beyond, exceeding a decade. This leads us to the current funded status deficit of $212 billion as of June 2019.

This article by Milliman consultant Zorast Wadia examines the sources of funded status volatility seen over the past two decades and discusses how plan sponsors of DB pension plans have adapted. It also covers the pros and cons of several popular de-risking mechanisms.