The firm’s Pension Funding Index (PFI), which consists of 100 of the largest defined benefit plans in the U.S.—i.e., the Milliman 100—shows these plans experienced a $21 billion increase in pension liabilities and a $6 billion increase in asset value during the month of April. This resulted in a $15 billion increase in the defined benefit plan funded status deficit, to a total of $258 billion.
This deficit is primarily due to a drop in the benchmark corporate bond interest rates used to value pension liabilities, according to Milliman. Asset improvements helped to partially offset the full extent of liability increases in April. As of April 30, the funded ratio fell to 84.7%, down from 85.3% at the end of March. The PFI reflects updated asset returns for the first quarter of this year.
“We keep slipping farther and farther away from full funding,” says John Ehrhardt, co-author of the PFI, who is based in Seattle. “The historic improvement of 2013 has been countered by a $72 billion decrease in funded status so far in 2014, with falling interest rates driving much of the change.”
The PFI also indicates that the projected benefit obligation (PBO), or pension liabilities, increased by $21 billion during April, raising the Milliman 100 PFI value to $1.685 trillion. The PBO change resulted from a decrease of 10 basis points (BPS) in the monthly discount rate to 4.20% for April, from 4.30% for March.
Offsetting the liability increase was April’s $6 billion investment gain in the market value of the pension assets to $1.427 trillion, up from $1.421 trillion at the end of March. The asset investment gain was 0.75% for the month. By comparison, data from the 2014 Milliman “Pension Funding Study” reported that the monthly median expected investment return during 2013 was 0.60% (7.4% annualized).
From May 2013 through this April, the cumulative asset return for these pensions has been 8.46% and the Milliman 100 PFI funded status deficit has improved by $103 billion, according to the PFI. The primary reason for the increase in the funded status has been the strong asset performance that was experienced throughout most of 2013.
Discount rates had rebounded from all-time lows during 2013, notes the PFI, although they have changed their direction thus far this year. The discount rate as of a year ago, on April 30, 2013, was 3.98%. The funded ratio of the Milliman 100 companies has increased over the past 12 months to 84.7% from 79.2%.
The authors of the PFI conclude, looking forward, that if the Milliman 100 plans were to achieve the expected 7.4% median asset return for their pension portfolios, and if the current discount rate of 4.20% were maintained, funded status would improve, with the funded status deficit shrinking to $228 billion (86.5% funded ratio) by the end of the year and to $175 billion (89.7% funded ratio) by the end of 2015.
The results of the PFI are 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 about the PFI can be found here.