May’s declining discount rates wipe out first quarter funded status gains for corporate pensions

Milliman has released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In May, the deficit for these plans rose by $22 billion from $257 billion to $279 billion, which was due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. As of May 31 the funded ratio had fallen to 83.8%, the 1.10% decline partially offset by investment returns.

Corporate pensions have experienced a drop of 23 basis points in discount rates since the start of the year, depleting funded status gains accumulated during the first quarter. While liabilities continue to pile up as discount rates decline, investment returns have been above expectations for first five months of 2017, preventing further deterioration to pension funded status.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.11% by the end of 2017 and 4.71% by the end of 2018) and asset gains (11.0% 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 (3.41% discount rate at the end of 2017 and 2.81% by the end of 2018 and 3.0% annual returns), the funded ratio would decline to 80% by the end of 2017 and 73% by the end of 2018.

To view the complete Pension Funding Index, click here. To receive regular updates of Milliman’s pension funding analysis, contact us here.

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