Corporate pension funding ratio down to 82.2% in February thanks to market volatility, low discount rates

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In February, discount rate declines combined with market volatility caused the PFI funding status to worsen by $71 billion, while the funded ratio for these plans dropped from 85.5% to 82.2% for the month. The last time the PFI funded ratio was this low was November 30, 2016.

February’s poor funding performance is the result of a 16-basis-point drop in the monthly discount rate, from 2.85% in January to 2.69% in February. February’s discount rate sets the record for the lowest rate ever recorded in the 20-year history of the PFI. Adding salt to the wound, the market value of assets for these plans fell by $28 billion due to the stock market volatility at the end of February. The PFI plans saw a monthly return of -1.48%. Since January 1, the deficit for the PFI plans has grown by $147 billion.

February was a rough month for corporate pension funding, and March is shaping up to be no better. COVID-19 fears and the drop in oil prices are driving steep market declines, which, when combined with the continued record-low interest rates, would indicate that March will likely be another dismal month for corporate pension funding.

Looking forward, under an optimistic forecast with rising interest rates (reaching 3.19% by the end of 2020 and 3.79% by the end of 2021) and asset gains (10.6% annual returns), the funded ratio would climb to 94% by the end of 2020 and 110% by the end of 2021.  Under a pessimistic forecast (2.19% discount rate by the end of 2020 and 1.59% by the end of 2021 and 2.6% annual returns), the funded ratio would decline to 77% by the end of 2020 and 71% by the end of 2021.

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

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