Funded Status of Corporate Pensions Improves

The funded status of corporate pensions improved in June by $47 billion.

According to the Pension Funding Index (PFI) from Milliman, Inc., the funded status of the 100 largest corporate defined benefit pension plans improved as higher interest rates reduced pension obligations and assets. The PFI funded ratio improved to 88.3%, up from 86% at the end of May.

The pensions’ deficit dropped to $179 billion from $226 billion at the end of May, as a sell-off in bonds continued and the benchmark corporate bond interest rates used to value pension liabilities rose. Declines in both the equity and fixed income markets resulted in a reduction of plan assets during June.

The projected benefit obligation, or pension liabilities, decreased by $72 billion during June, lowering the PFI value to $1.538 trillion from $1.610 trillion at the end of May. A 33-basis-point improvement in the monthly discount rate to 4.74% for June, from 4.41% for May, drove the change.

The market value of assets decreased by $25 billion as a result of June’s investment loss of 1.71%. The PFI asset value decreased to $1.359 trillion, down from $1.384 trillion at the end of May. By comparison, Milliman research reported that the median expected investment return during 2012 was 0.60% (7.5% annualized). Despite June’s poor investment performance, assets have returned a respectable 3.53% thus far.