Interest Rate Rise Helps Offset Pension Investment Setbacks

October 13, 2008 ( - While the assets of the Milliman 100 pension plans suffered major investment losses (more than $78 billion) during September, significant increases in interest rates (more than 80 basis points) produced offsetting liability gains, according to a Milliman news release.

The news release said the net result is that the funded status for the pensions of the Milliman100 companies dropped by $9 billion during September. As of September 30, the funded ratio had decreased to 98.4%, well below the 104.9% ratio seen at the end of 2007 (and down from 99.3% at the end of August).

The market value of assets experienced a dramatic downturn in September, decreasing by about $78 billion, from $1.186 trillion to $1.108 trillion, Milliman said. The September monthly asset return was approximately -6.18%.

At the same time, the projected benefit obligation (PBO) or pension liabilities decreased by $69 billion during September, moving from $1.195 trillion to $1.126 trillion. The decrease in PBO was primarily attributable to the significant rise in the monthly discount rate from 6.8% for August to 7.63% for September. The 83 basis point increase was the largest monthly swing in the discount rate seen in the last several years.

For the third quarter, funded status fell by nearly $9 billion, with the funded ratio dropping from 99.2% to 98.4%. Discount rates rose by 100 basis points in the past quarter, generating liability gains that offset the significant investment losses.

According to Milliman, if for the remainder of the year the pension plans of the Milliman 100 companies earn a 0% return and discount rates remain at September’s 7.63%, the funded status of the Milliman 100 companies is projected to decrease by $22 billion with a funded ratio of 96.4% on December 31.

This would indicate a projected pension deficit of $40 billion at year end and would mark a surplus loss of $101 billion for the year.