US corporate pension plans see funding boost

Despite poor April investment returns, rising discount rates drove an improvement in pension funding ratios

US corporate pension plans see funding boost

Milliman has announced the findings from its latest Milliman 100 Pension Funding Index (PFI), which evaluates the 100 largest US corporate pension plans.  

The report shows a positive shift in the funded ratio during April, improving from 102.2 percent at the end of March to 103.4 percent by April 30.  

The rise in the funded ratio is attributed to increasing discount rates, which surged by 44 basis points from 5.24 percent in March to 5.68 percent in April, consequently decreasing plan liabilities by $60bn.  

This reduction in liabilities offset the negative impact of April’s investment returns, which saw a decline of 3.00 percent, reducing the market value of PFI plan assets by $46bn.   

Zorast Wadia, the author of the PFI, remarked on the unusual nature of the funding improvement. “April’s investment performance was the worst of the year so far, and we would not typically expect to see a funding improvement in a month with 3 percent losses,” he said.  

“But with discount rates soaring 44 basis points for the period, the liability reduction far outweighed the drop in assets, resulting in further progress for the plans toward a funding surplus and enhancing the risk-management options available to plan sponsors.”   

Looking ahead, the report provides forecasts under two scenarios. In an optimistic forecast where interest rates continue to rise, reaching 6.08 percent by the end of 2024 and 6.68 percent by the end of 2025, with annual asset returns of 10.4 percent, the funded ratio could climb to 111 percent by the end of 2024 and 124 percent by the end of 2025.  

Conversely, under a pessimistic scenario with interest rates declining to 5.28 percent by the end of 2024 and 4.68 percent by the end of 2025, combined with lower annual returns of 2.4 percent, the funded ratio is projected to decrease to 97 percent by the end of 2024 and 88 percent by the end of 2025.