The index is published monthly by Milliman and tracks the 100 largest defined benefit (DB) pension plans sponsored by U.S. employers (i.e., the Milliman 100). In February, these plans experienced a $32 billion increase in asset values, but also saw a $21 billion increase in pension liabilities resulting from falling interest rates—driving an $11 billion overall improvement in pension funded status.
“In February, these plans were buoyed by strong market performance that offset yet another increase in pension liabilities,” explains John Ehrhardt, co-author of the Milliman Pension Funding Index. “For the year, we’ve seen liabilities increase by more than $80 billion in response to rate movements. These rates have defined pension performance for the last several years. We’ll need some cooperative rates to get back to full funding.”
Put simply, falling rates increase long-term pension plan liabilities because employers’ must contribute more today to ensure assets will grow sufficiently to meet future benefit demands. Higher interest rates mean employers can contribute less today to reach the same level of assets later.
Looking forward, if the Milliman 100 pension plans were to achieve the expected 7.5% median asset return for their pension portfolios, and if the current discount rate of 4.46% were maintained, funded status would continue to improve over time, with the funded status deficit shrinking to $58 billion (96.4% funded ratio) by the end of 2014 and turning into a surplus of $34 billion (102.1% funded ratio) by the end of 2015.
The results of the index are based on the actual pension plan accounting information disclosed in the footnotes of the surveyed companies’ public financial reporting. In addition to providing the financial information on the funded status of U.S. qualified pension plans, the footnotes may also include figures for the companies’ nonqualified and foreign plans, both of which are often unfunded or subject to funding standards different from those for U.S. qualified pension plans.