Falling Interest Rates Widen Pension Funding Gap in April

May 11, 2011 (PLANSPONSOR.com) - A $31 billion increase in liabilities offset a $19 billion increase in assets, widening the pension funding gap of the Milliman 100. 

And, according to a press release, that took the funding gap of Milliman’s Pension Funding Index (PFI) to $184 billion from $172 million in March.  The PFI consists of 100 of the nation’s largest defined benefit pension plans. In April, these plans saw pension liabilities increase by the aforementioned $31 billion (due to a drop in interest rates), overshadowing a $19 billion increase in assets. This resulted in a $12 billion increase to the funded status deficit.

“It was a good-news/bad-news month,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “The good news: continued asset growth. The bad news: interest rates were again the big story, driving pension liabilities upward once again.”

Over the last 12 months, the cumulative asset return has been 10.5% and the Milliman 100 PFI funded status has improved by $50 billion, pushing the funded ratio from 82.7% up to 87.2% at the end of April.

April’s $19 billion increase in market value raises the Milliman 100 PFI asset value to $1.252 trillion, up from $1.233 trillion at the end of March 2011. By comparison, the Milliman 2011 Pension Funding Study, published in March 2011, reported a 0.64% (8.00% annualized) median expected monthly investment return during 2010.

The projected benefit obligation (PBO), or pension liabilities, increased by $31 billion during April, raising the Milliman 100 PFI value to $1.436 trillion from $1.405 trillion. The higher PBO resulted from a decrease of 16 basis points in the monthly discount rate to 5.37% for April, from 5.53% for March 2011, according to the consultancy.

Over the last 12 months (May 2010 – April 2011), the cumulative asset return has been 10.5% and the Milliman 100 PFI funded status has increased by $50 billion. For these 12 months, the funded ratio of the Milliman 100 companies improved to 87.2% from 82.7%.


2012-2013 projections

According to the report, if the Milliman 100 PFI companies were to achieve an 8.0% median asset return (as per the 2011 Pension Funding Study) expected for their pension plan portfolios and if the current discount rate of 5.37% were to be maintained during 2011 through 2013, Milliman forecasts a deficit of $145 billion (funded ratio of 90.0%) by the end of 2011, a deficit of $83 billion (funded ratio of 94.3%) by the end of 2012, and a deficit of $18 billion (funded ratio of 98.8%) by the end of 2013.  Milliman explaned that, for purposes of this forecast, they had assumed 2011-2013 aggregate contributions to remain level with 2010 contribution amounts, which were a record $60 billion.

Milliman also noted that under an optimistic forecast with rising interest rates (reaching 6.37% by the end of 2012 and 6.97% by the end of 2013) and asset gains (12.0% annual returns), the funded ratio would climb to 114% by the end of 2012 and 133% by the end of 2013. Under a pessimistic forecast with similar interest rate and asset movements (4.37% discount rate at the end of 2012 and 3.77% by the end of 2013 and 4.0% annual returns), the funded ratio would decline to 77% by the end of 2012 and 72% by the end of 2013.

The complete study is available at http://ow.ly/4xFIt.