However, for the year, these pensions experienced asset increases of $50 billion but a liability increase of $99 billion, increasing the pension funded status deficit by $49 billion. The $49 billion funding decrease during 2010 added to the $242 billion deficit already in place at the end of 2009, bringing the 2010 year-end funded status deficit to $291 billion.
According to the Index report, the loss in funded status during 2010 resulted in a charge to corporate balance sheets at the end of the 2010 fiscal year and is expected to produce an estimated increase of $4 billion in pension expense for 2011.
Milliman said December’s funded status improvement was primarily due to strong investment performance coupled with an increase in corporate bond interest rates. In December, the funded ratio rose to 79.8% from 77% at the end of November. December’s $24 billion increase in market value brings the Milliman 100 PFI asset value to $1.145 trillion, up from $1.121 trillion at the end of November 2010, an investment gain of 2.6% for the month.
Pension liabilities decreased by $20 billion during December, lowering the Milliman 100 PFI value to $1.436 trillion from $1.456 trillion at the end of November 2010. The change resulted from an increase of 12 basis points in the monthly discount rate to 5.32% for December from 5.20% for November 2010.
Milliman estimates that if the Milliman 100 PFI companies were to achieve their 8.1% median 2010 asset return expected for their pension plan portfolios and if the current discount rate of 5.32% were to be maintained during years 2011 and 2012, the funded status of the surveyed plans would increase, resulting in a projected pension deficit of $261 billion (funded ratio of 82.0%) by the end of 2011 and a projected pension deficit of $208 billion (funded ratio of 85.9%) by the end of 2012. For purposes of this forecast, the firm assumed 2011 aggregate contributions to increase by 50% over their 2010 level and 2012 aggregate contributions would increase by 50% over their 2011 expected level.
Under an optimistic forecast with rising interest rates (reaching 6.52% by the end of 2012) and asset gains (12.1% annual returns), the funded ratio would climb to 107% by the end of 2012. Under a pessimistic forecast with similar interest rate and asset movements (4.12% discount rate at the end of 2012 and 4.1% annual returns), the funded ratio would decline to 68% by the end of 2012, the report said.The Milliman 100 Pension Funding Index is at http://www.milliman.com/expertise/employee-benefits/products-tools/pension-funding-index/.