The firm’s Pension Funding Index (PFI), which consists of the 100 largest U.S. DB plans (i.e., the Milliman 100), reveals that these plans experienced a $10 billion increase in pension liabilities during the month. The $268 billion deficit at the end of May is primarily due to a drop in the benchmark corporate bond interest rates used to value pension liabilities. Investment gains helped to partially offset the full extent of liability increases, but the funded ratio fell to 84.3% from 84.7% at the end of April.
May’s funded status decline was quite similar to that in April, according to the Milliman, with lower interest rates increasing liabilities to a level that could not be offset by rising assets. May was the fifth consecutive month of interest rate decreases. The PFI notes that the strong year-to-date asset performance has mitigated further erosion.
The PFI also shows the projected benefit obligation (PBO), or pension liabilities, increased by $29 billion during May, raising the total for the Milliman 100 PFI to $1.715 trillion. The PBO change resulted from a decrease of 14 basis points in the monthly discount rate to 4.06% for May, from 4.20% for April. The last time the discount rate was this low was April 2013, when it stood at 3.98%.
The market value of assets increased by $19 billion as a result of May’s investment gain of 1.61%. The Milliman 100 PFI asset value increased to $1.446 trillion, up from $1.427 trillion at the end of April. By comparison, the “2014 Milliman Pension Funding Study” reported that the monthly median expected investment return during 2013 was 0.60% (7.4% annualized).
From June 2013 to May 2014, the cumulative asset return for these pensions has been 10.54%, but the Milliman 100 PFI funded status deficit has only improved by $5 billion. In spite of the strong asset performance, the funded status has not shown a great improvement over the past 12 months due to decreasing interest rates. Although discount rates rose during most of 2013, they have taken a downward turn for all of 2014. Since May 31, 2013, the discount rate has dropped 35 basis points to 4.06% from 4.41%. The funded ratio of the Milliman 100 companies has increased over the past 12 months to 84.3% from 83.3%.
The results of the PFI were based on the actual pension plan accounting information disclosed in the footnotes to the companies’ annual reports for the 2013 fiscal year and for previous fiscal years. More information can be found here.