Investment losses and a drop in corporate bond interest rates in September took their toll on the funding status of the country’s largest defined benefit pension funds.
That resulted in a $28 billion hit in September to the collective funding status of the 100 largest pensions, according to the Milliman 100 Pension Funding Index.
Collectively, the pensions’ funding deficit is now $312 billion.
At the end of September, which marked the end of 2015’s third quarter, the aggregate funding status was 81.7 percent, down from 83.3 percent at the end of August, and down from 85.5 percent at the end of the second quarter in June.
In September, the value of all the invested assets in the funds decreased $19 billion. Compounding poor market returns was a $9 billion increase in expected liabilities, due to a drop in the benchmark corporate bond interest rate, which is used to value pension liabilities.
That rate dropped 4 basis points in September, to 4.19 percent, a decrease from 4.23 percent in August.
Investment losses for the third quarter, driven by volatile equity markets in August and September, totaled $51 billion. That represents the largest third-quarter loss since 2011.
In its 2015 Pension Study, Milliman set the expected annual return in pension investments for the year to be 7.3 percent.
In order to hit that expectation and reverse the trend in decreasing funded status, sponsors are going to have to have equity markets gain some considerable steam for the rest of the year.
“It will take a massive rally in the fourth quarter for these 100 pensions to sniff their annual expected return of 7.3 percent,” said John Ehrhardt, co-author of the Milliman 100 Pension Funding Index, in a statement.
Just how well will those pension assets have to perform for the rest of the year to recoup losses this year?
Milliman says a fourth quarter investment gain of 8.4 percent will be necessary just to meet the annual 7.3 percent expected investment gain for the year.
For context, the largest monthly increase in assets over the past year was 1.62 percent in November 2014, according to Milliman.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
