The funding deficit for the nation's 100 largest corporate pension plans grew in September, increasing by $124 billion, according to Milliman's 100 Pension Funding Index. This was the largest monthly drop in the plans' funded status in 11 years, the report said.
The large drop came because of investment losses and a decrease in corporate bond interest rates that are used to value pension liabilities.
"As of Sept. 30, the funded ratio plummeted to 72.8 percent from 79.3 percent at the end of August. The funded status deficit increased from $315 billion to $439 billion. The funded status has eroded by more than $252 billion since June 30. The third calendar quarter of 2011 has been the most significant three-month decline since the start of the financial crisis during the last quarter of 2008," the report concluded.
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Pension liabilities increased by $93 billion in September, raising the Milliman 100 PFI value to $1.6 trillion from $1.5 trillion at the end of August. According to the analysis, the change resulted from a decrease of 42 basis points in the monthly discount rate to 4.54 percent for September, from 4.96 percent in August. This is the lowest discount rate in the 11-year history of the Milliman 100 PFI.
The index lost $31 billion in market value in September, bringing its asset value to $1.175 trillion. The third quarter has seen a cumulative asset return of -4.81 percent and an increase in pension liabilities of 14.22 percent. The result was a funded status decline of $252 billion for the quarter. According to the analysis, the funded ration of the Milliman 100 companies decreased to 72.8 percent from 87 percent. "The pension assets would have to provide a 9.4 percent return by the close of the year just to meet the expected 8 percent return assumption."
Year-to-date, the cumulative asset return has been -1.31 percent.
If the Milliman 100 PFI companies achieved the expected 8 percent median asset return (as per the 2011 pension funding study) prorated for the remainder of the year, and if the current discount rate of 4.54 percent were to be maintained through 2013, "we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $426 billion (funded ratio of 73.7 percent) by the end of 2011, a projected pension deficit of $374 billion (funded ratio of 77.1 percent) by the end of 2012, and a projected pension deficit of $319 billion (funded ratio of 80.8 percent) by the end of 2013. For purposes of this forecast, we have assumed 2011-2013 aggregate contributions to remain level with 2010 contribution amounts, which were a record $60 billion."
If interest rates reached 5.29 percent by the end of 2012 and 5.89 percent by the end of 2013, with 12 percent annual returns, the funded ratio would jump to 89 percent by the end of 2012 and to 105 percent by the end of 2013, the report projected. If interest rates dropped to 3.79 percent at the end of 2012 and 3.19 percent by the end of 2013, with 4 percent annual returns, the funded ratio would decline to 66 percent by the end of 2012 and 61 percent by the end of 2013, the report stated.
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