Pension Funding Falls as Interest Rates Drop

Milliman said May’s funded status erosion was due primarily to a decrease in corporate bond interest rates that are the benchmarks used to value pension liabilities. As of May 31, the funded ratio fell to 85.6%, down from 87.2% at the end of April, increasing the funded status deficit to $210 billion. Although, this was the first time the deficit crossed the $200 billion threshold since December 2010, it still paled in comparison to the $446 billion at the end of August 2010.  

The Milliman 100 PFI asset value remained at $1.252 trillion as a result of a small investment gain of 0.12% for the month and due to assumed benefit payments in excess of assumed contributions. 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 $26 billion during May, moving the Milliman 100 PFI value to $1.462 trillion. The change resulted from a decrease of 13 basis points in the monthly discount rate to 5.24% for May, from 5.37% for April.  

Over the last 12 months (June 2010 – May 2011), the cumulative asset return has been 14.3% and the Milliman 100 PFI funded status has increased by $77 billion. For these 12 months, the funded ratio of the Milliman 100 companies improved to 85.6% from 79.0%.  

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 5.24% were maintained from 2011 through 2013, Milliman forecasts a projected pension deficit of $176 billion (funded ratio of 88.0%) by the end of 2011, a projected pension deficit of $115 billion (funded ratio of 92.3%) by the end of 2012, and a projected pension deficit of $50 billion (funded ratio of 96.7%) by the end of 2013.   

For purposes of this forecast, Milliman assumed 2011-2013 aggregate contributions to remain level with 2010 contribution amounts, which were a record $60 billion.  

Under an optimistic forecast with rising interest rates (reaching 6.19% by the end of 2012 and 6.79% by the end of 2013) and asset gains (12.0% annual returns), the funded ratio would climb to 110% by the end of 2012 and to 129% by the end of 2013. Under a pessimistic forecast (4.29% discount rate at the end of 2012 and 3.69% by the end of 2013 and 4.0% annual returns), the funded ratio would decline to 76% by the end of 2012 and to 70% by the end of 2013.