London Market Monitor – 31 May 2022
Our May review of the markets and Solvency II discount rates.
Milliman 100 PFI funded ratio rises to 89.8%
The funded status of the 100 largest corporate defined benefit pension plans improved by $39 billion during January as measured by the Milliman 100 Pension Funding Index (PFI). The funded status deficit dipped below $200 billion for the first time since December 31, 2019, to $196 billion from $235 billion at the end of December 2020, due to liability gains incurred during January. The liability improvement was the result of an increase in the benchmark corporate bond interest rates used to value pension liabilities. As of January 31, the funded ratio rose to 89.8%, up from 88.1% at the end of December. January’s impressive funded status improvement piggybacks off the $70 billion funded status improvement seen in the fourth quarter of 2020. The funded ratio has crept up steadily over the past four months.
The market value of assets fell by $7 billion as a result of January’s investment loss of -0.21%. The Milliman 100 PFI asset value decreased to $1.738 trillion as of January 31, 2021. By comparison, the 2020 Milliman Pension Funding Study reported that the monthly median expected investment return during 2019 was 0.53% (6.5% annualized). The expected rate of return for 2020 will be updated in the 2021 Milliman Pension Funding Study (PFS), due out in April of this year.
The projected benefit obligation (PBO), or pension liabilities, decreased to $1.935 trillion at the end of January. The change resulted from an increase of 16 basis points in the monthly discount rate to 2.62% for January from 2.46% for December 2020.
|MV||PBO||FUNDED STATUS||FUNDED PERCENTAGE|
Note: Numbers may not add up precisely due to rounding
Over the last 12 months (February 2020 to January 2021), the cumulative asset return for these pensions has been 10.26% and the Milliman 100 PFI funded status deficit has improved by $61 billion. The funded status gain would have been significantly higher were it not for the general downward trend in discount rates during 2020. The funded ratio of the Milliman 100 companies has increased over the past 12 months to 89.8% from 86.4%.
The projected asset and liability figures presented in this analysis will be adjusted as part of our annual 2021 PFS where pension settlement and annuity purchase activities that occurred during 2020 will be reflected. Pension plan accounting information disclosed in the footnotes of the Milliman 100 companies’ annual reports for the 2020 fiscal year is expected to be available during the first quarter of 2021 as part of the 2021 PFS. We expect to publish our comprehensive recap in April.
If the Milliman 100 PFI companies were to achieve the expected 6.5% median asset return (as per the 2020 Pension Funding Study), and if the current discount rate of 2.62% were maintained during 2021 and 2022, we forecast that the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $123 billion (funded ratio of 93.6%) by the end of 2021 and a projected pension deficit of $40 billion (funded ratio of 97.9%) by the end of 2022. For purposes of this forecast, we have assumed 2021 and 2022 aggregate annual contributions of $50 billion.
Under an optimistic forecast with rising interest rates (reaching 3.17% by the end of 2021 and 3.77% by the end of 2022) and asset gains (10.5% annual returns), the funded ratio would climb to 104% by the end of 2021 and 123% by the end of 2022. Under a pessimistic forecast with similar interest rate and asset movements (2.07% discount rate at the end of 2021 and 1.47% by the end of 2022 and 2.5% annual returns), the funded ratio would decline to 84% by the end of 2021 and 77% by the end of 2022.
For the past 20 years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies. The Milliman 100 Pension Funding Index projects the funded status for pension plans included in our study, reflecting the impact of market returns and interest rate changes on pension funded status, utilizing the actual reported asset values, liabilities, and asset allocations of the companies’ pension plans.
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 2019 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2020 Pension Funding Study, which was published on April 28, 2020. 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 different funding standards than those for U.S. qualified pension plans. They do not represent the funded status of the companies’ U.S. qualified pension plans under ERISA.