Pensions See Near-Record Funding Deficit in June

Plunging discount rates drove up pension liabilities in June, swamping asset improvement and capping a bad second quarter. 

Milliman’s  Pension Funding Index, which consists of 100 of the nation’s largest defined benefit pension plans found that corporate pensions in June experienced a $57 billion decrease in funded status based on a $77 billion increase in the pension benefit obligation (PBO) and a $20 billion increase in asset value. The $57 billion decrease in funded status pairs with the combined April and May decreases of $129 billion, increasing the funding deficit by $186 billion during the second quarter.

“With the help of the lowest discount rate in the 12-year history of our study, corporate pensions last month saw their funding deficit increase to a near-record $415 billion,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “This is the second worst deficit we’ve seen.”

In June, the discount rate used to calculate pension liabilities fell from 4.56% to 4.32%, pushing up the PBO to $1.698 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.263 trillion to $1.283 trillion.

Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.32% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funded ratio from 75.6% to 77.4% by the end of 2012 and to 82.0% by the end of 2013.

The results of the Milliman 100 Pension Funding Index were based on the actual pension plan accounting information disclosed in the footnotes to the companies’ annual reports for the preceding fiscal year and for previous fiscal years.

To view the study, click here.