According to the consultancy, June’s funded status amelioration was due primarily to an increase in corporate bond interest rates that are the benchmarks used to value pension liabilities. As of June 30, 2011, the funded ratio advanced to 87.0%, up from 85.5% at the end of May 2011, and the funded status deficit decreased to $186 billion from $211 billion at the end of the previous month.
The projected benefit obligation (PBO), or pension liabilities, decreased by $35 billion during June, moving the Milliman 100 PFI value to $1.427 trillion from $1.462 trillion at the end of May 2011. The change resulted from an increase of 19 basis points in the monthly discount rate to 5.43% for June, from 5.24% for May 2011, according to the report.
There was an offsetting decrease to the Milliman 100 PFI asset value of $10 billion during June, moving the Milliman 100 PFI asset value to $1.241 trillion, down from $1.251 trillion as of the end of June 2011. That decrease was driven by an investment loss of 2.07% for the month, according to Milliman. 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.
For the quarter that ended June 30, 2011, the assets had an investment gain of 1.1%. However, the funded status has fallen by $14 billion primarily due to a net interest decline over the past quarter. For these 3 months, the funded ratio of the Milliman 100 companies slipped to 87.0% from 87.7%.
Over the last 12 months, the cumulative asset gain has been 15.0% and the Milliman 100 PFI funded status has increased by $182 billion. For that 12 month period – July 2011 through June 2011 – the funded ratio of the Milliman 100 companies improved to 87.0% from 74.2%.
If the Milliman 100 PFI companies were to achieve the expected 8.0% median asset return (as per the 2011 pension funding study) for their pension plan portfolios and the current discount rate of 5.43% were to be maintained during years 2011 through 2013, Milliman says that the funded status of the surveyed plans would increase, resulting in a projected pension deficit of $157 billion (funded ratio of 89.0%) by the end of 2011, a projected pension deficit of $97 billion (funded ratio of 93.3%) by the end of 2012, and a projected pension deficit of $34 billion (funded ratio of 97.7%) by the end of 2013. For purposes of this forecast, Milliman says that it assumed 2011-2013 aggregate contributions to remain level with 2010 contribution amounts, which were a record $60 billion.
Under what Milliman described as an optimistic forecast with rising interest rates (reaching 6.33% by the end of 2012 and 6.93% by the end of 2013) and asset gains (12.0% annual returns), the consultancy said that the funded ratio would climb to 110% by the end of 2012 and 129% by the end of 2013. Under what it termed a pessimistic forecast with similar interest rate and asset movements (4.53% discount rate at the end of 2012 and 3.93% by the end of 2013 and 4.0% annual returns), the funded ratio would decline to 78% by the end of 2012 and 72% by the end of 2013.