January’s discount rate hits 20-year record low, dropping corporate pension funding significantly

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In January, steep discount rate declines caused the PFI funding deficit to swell by $73 billion; the funded ratio for these plans subsequently dropped from 89.0% to 85.7% for the month.

January’s poor funding performance is the result of a 35-basis-point drop in the monthly discount rate, from 3.20% in December to 2.85%, setting the record for the lowest rate ever recorded in the 20-year history of the PFI, and only the second time the PFI’s monthly discount rate has dropped below 3.00%. Pension liabilities increased by $87 billion in January as a result, with the losses only partially offset by strong investment gains of $14 billion.

Corporate pensions are now starting off the year trying to dig their way out of a hole created by January’s steep discount rate drop. While much of the funding improvement from the fourth quarter of 2019 has been wiped out, there’s a silver lining in the strong investment returns experienced this month. Let’s hope that continues, with discount rates rising above 3% again.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.40% by the end of 2020 and 4.00% by the end of 2021) and asset gains (10.6% annual returns), the funded ratio would climb to 99% by the end of 2020 and 116% by the end of 2021.  Under a pessimistic forecast (2.30% discount rate by the end of 2020 and 1.70% by the end of 2021 and 2.6% annual returns), the funded ratio would decline to 80% by the end of 2020 and 73% by the end of 2021.

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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