Historic low interest rates widen pension funding deficit by $74 billion in 2012

Milliman today released the results of its latest Pension Funding Index, which consists of 100 of the nation’s largest corporate defined benefit pension plans. In December, these pensions experienced a $54 billion increase in funded status based on a $46 billion decrease in the pension benefit obligation (PBO) and a $8 billion increase in assets. The $54 billion improvement in December follows a $34 billion improvement in November, but it would still take many more months of improvement to make up for a year of ballooning pension deficit. At year end, the deficit of $412 billion is $74 billion higher than it was when 2011 ended.

 

It was a good year on the asset side, with these pensions experiencing a $90 billion gain. But it was a rough year on the liability side, with interest rates driving a $164 billion increase in the pension benefit obligation. People may be getting tired of hearing me saying it but interest rates have been the story for the last four years and that’s not going to change in 2013. 

In December, the discount rate used to calculate pension liabilities increased from 4.05% to 4.18%, decreasing the PBO from $1.794 trillion to $1.748 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.328 trillion to $1.336 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.18% were to be maintained throughout 2013 and 2014, these pensions would improve the pension funded ratio from 76.4% to 81.0% by the end of 2013 and to 85.7% by the end of 2014.

These year-end figures are only tentative, and will be revisited when the 2013 Milliman Pension Funding Study is completed in March. De-risking activities made by some of these companies will probably lower asset and liability figures, which we expect to have a slightly negative impact on the overall funded status of these plans.

About John Ehrhardt

John is a principal and consulting actuary in the New York office of Milliman. He joined the firm in 1983. John is the author of Milliman’s annual Pension Funding Survey and the Milliman 100 Pension Funding Index, which analyze the funded status of the pension plans of 100 of the largest U.S. corporations.