Milliman today released the year-end results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. In 2018, corporate pension funding ended higher for the year, with the funding ratio climbing from 87.6% at the end of 2017 to 89.9% as of December 31, 2018. While plan assets declined by $93 billion for the year due to poor asset performance, plan liabilities also fell thanks to a discount rate increase of 66 basis points. In aggregate these plans experienced a $56 billion improvement in funded status for the year.
Assets underperformed expectations in 2018, with a cumulative investment loss of 2.77% (by comparison, the 2018 Pension Funding Study reported that the monthly median expected investment return was 0.55%, or 6.8% annualized). In December, the Milliman 100 PFI experienced its worst funding month of the year, with a $68 billion drop in funded status that resulted from 1.49% investment losses and a decline in the corporate bond interest rates that are used to value pension liabilities. As such, December 2018 ended with a funded ratio just under 90%, despite the PFI posting funded ratios above 90% for each of the 11 preceding months of the year.
The fourth quarter’s asset losses and stagnant discount rates derailed what had started out as an optimistic year for corporate pensions. Looking ahead to 2019, with those asset losses and in spite of the discount rate improvement we’re likely to see pension expense increase in the coming year. Milliman’s upcoming 2019 Pension Funding Study will provide more specific details around what’s expected.
Looking forward, under an optimistic forecast with rising interest rates (reaching 4.79% by the end of 2019 and 5.39% by the end of 2020) and asset gains (10.8% annual returns), the funded ratio would climb to 104% by the end of 2019 and 120% by the end of 2020. Under a pessimistic forecast (3.59% discount rate at the end of 2019 and 2.99% by the end of 2020 and 2.8% annual returns), the funded ratio would decline to 83% by the end of 2019 and 77% by the end of 2020.
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