Five months of corporate pension funded status improvement ends with February’s $6 billion decline

Milliman today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In February, after five months of steady improvement, these pension plans experienced a $6 billion decline in funded status primarily due to discount rates that plunged from 4.00% in January to 3.89% in February, an 11 basis point drop. The funded ratio for these pensions inched down from 81.6% to 81.5% over the same time period. Robust investment gains of 1.74% helped offset the funded status decline.

While February’s strong investment gains helped soften the blow dealt by the discount rate decline, all eyes are on interest rates right now. The Federal Reserve has signaled it will raise rates this month, which would be welcome news for pension plans.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.39% by the end of 2017 and 4.99% by the end of 2018) and asset gains (11.2% annual returns), the funded ratio would climb to 91% by the end of 2017 and 104% by the end of 2018. Under a pessimistic forecast (3.39% discount rate at the end of 2017 and 2.79% by the end of 2018 and 3.2% annual returns), the funded ratio would decline to 75% by the end of 2017 and 69% by the end of 2018.

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