The Milliman 100 Pension Funding Index, which tracks 100 of the nation's largest defined benefit pension plans, released a report showing that these plans experienced a $42 billion improvement in funded status in October. The improvement came on the heels of the second-worst financial quarter on record, in which the third-quarter pension funding deficit jumped $254 billion.
The worst quarter on record is the fourth quarter of 2008, when the financial crisis hit. With the final two months of 2011 now here, there is likely to be more scrutiny in daily changes in discount rates and investment performance as the year winds down.
For the past 11 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 its 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.
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"These pensions needed some positive news, and the 3.87 percent investment gain in October has provided welcome relief from the dismal results of the third quarter," said John Ehrhardt, co-author of the Milliman Pension Funding Study. "But the interest rates that have driven these historic liabilities barely budged last month. The low-interest-rate-driven pension funding deficit continues to be the elephant in the room."
Year-to-date, the cumulative asset return on these 100 pensions has been 2.44 percent and the Milliman 100 PFI funded status has decreased by $170 billion, dropping the funded ratio from 84.1 percent to 75.4 percent.
"If the Milliman 100 PFI companies were to achieve the expected 8 percent (as per the 2011 pension funding study) median asset return prorated for the remainder of the year for their pension plan portfolios, and the current discount rate of 4.53 percent were to be maintained during years 2011 through 2013, we forecast the funded status of the surveyed plans would increase. This would result in a projected pension deficit of $334 billion (funded ratio of 79.6 percent) by the end of 2012, and a projected pension deficit of $275 billion (funded ratio of 83.4 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," according to the report.
Under an optimistic forecast with rising interest rates (reaching 5.23 percent by the end of 2012 and 5.83 percent by the end of 2013) and asset gains (12 percent annual returns), the funded ratio would climb to 91 percent by the end of 2012 and to 108 percent by the end of 2013. Under a pessimistic forecast with similar interest rate and asset movements (3.83 percent discount rate at the end of 2012 and 3.23 percent by the end of 2013, and 4.0 percent annual returns), the funded ratio would decline to 69 percent by the end of 2012 and 64 percent by the end of 2013, the report found.
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