Corporate pensions experience stellar investment returns alongside sinking discount rates in 2017

Milliman today released the year-end results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. During 2017, despite superb investment gains, these pensions experienced an overall $2 billion decrease in funded status due to a decline in the corporate bond rates used to measure pension liabilities. In December, the Milliman 100 PFI discount rate fell 46 basis points to 3.53%, marking the lowest year-end discount rate and fifth-lowest monthly discount rate in the PFI’s 17-year history.

In contrast to declining discount rates, assets outperformed expectations in 2017 with a cumulative investment gain of 11.47% (by comparison, the 2017 Pension Funding Study reported a 7.0% annualized expected rate of return). The 2017 funding ratio for the Milliman PFI plans ticked up from 83.3% at the end of 2016 to 84.1% as of December 31, 2017 – despite the overall $2 billion decrease in funded status.

There are a few items on the radar for corporate pensions in 2018. We expect pension expenses to decrease by around $2.6 billion, thanks to last year’s stellar investment experience. And with the passage of tax reform, plan sponsors may decide to take a closer look at accelerating contributions with an eye toward further de-risking efforts.

Looking forward, under an optimistic forecast with rising interest rates (reaching 4.13% by the end of 2018 and 4.73% by the end of 2019) and asset gains (11.0% annual returns), the funded ratio would climb to 97% by the end of 2018 and 112% by the end of 2019. Under a pessimistic forecast (2.93% discount rate at the end of 2018 and 2.33% by the end of 2019 and 3.0% annual returns), the funded ratio would decline to 77% by the end of 2018 and 71% by the end of 2019.

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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