Over the second quarter, increases in pension liability valuations were only partially offset by gains in assets, resulting in a lower funded status across the 100 largest corporate defined benefit pension plans that make up the Milliman 100 Pension Funding Index Survey*. The June 30, 2020 Index was 83.7% compared to a revised 86.2% at the end of March.
Projected benefit obligations rose on average 10.3% as the liability discount rate declined to 2.65% at the end of June as compared to 3.39% at the end of March 2020. However, pension asset portfolios (which are typically partially to fully hedged) increased only 7.2% on average, although the S&P 500 rose 20.5% over the same time period.
The corporate discount rate reached an all-time low in June. A year ago the discount rate was 3.45%, and the funded ratio was around 88.8%. Over the year, assets were higher by 3.8%, but liabilities rose 10.0% as the Federal Reserve bank dropped the Federal Funds rate to near zero at the outbreak of Covid-19 at the end of the first quarter.
The Fed anticipates interest rates to stay low through 2021. If the discount rate holds at the current level, and assets return 6.5% annualized over the next 18 months, Milliman projects the Pension Funding Index could improve to 89.0% by the end of 2021. It should be noted that this calculation is predicated on corporations continuing to make regular, ongoing contributions.
*Source: Milliman Pension Funding Index Survey, July 13, 2020, and Society of Actuaries.