Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In September, the PFI deficit fell to $269 billion primarily due to an increase in the benchmark corporate bond interest rates used to value pension liabilities. The monthly discount rate for these pensions climbed 14 basis points, from 2.95% in August to 3.09% for September—an improvement, but still the second-lowest discount rate recorded in the 19-year history of the Milliman 100 PFI. With asset returns flat for the month, September’s funded status for the Milliman PFI improved by $38 billion, while the funded ratio for these plans rose slightly, from 83.8% to 85.4%.
While September was overall positive for corporate pensions, we’re not out of the abyss created by the historically low discount rates in Q3. In fact, over the past 12 months, discount rates have fallen by over 100 basis points. While asset returns may provide some relief, Q4 will turn out to be bleak for pensions if interest rates don’t improve.
Looking forward, under an optimistic forecast with rising interest rates (reaching 3.24% by the end of 2019 and 3.84% by the end of 2020) and asset gains (10.6% annual returns), the funded ratio would climb to 89% by the end of 2019 and 104% by the end of 2020. Under a pessimistic forecast (2.94% discount rate at the end of 2019 and 2.34% by the end of 2020 and 2.6% annual returns), the funded ratio would decline to 84% by the end of 2019 and 77% by the end of 2020.
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