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Asset Returns Weigh on Pension Funded Status

Wider credit spreads pushed the corporate bond discount rate used to value liabilities to 3.39% at the end of the quarter, from the recent low of 2.69% at the end of the previous month. At that time, the discount rate was the lowest on record over the last 20 years. However, the discount rate was above the 2019 year-end level of 3.20%.

Overall, the March 2020 Milliman 100 Pension Funding Index Survey* reported that funded status declined to 85.6% from 89.0% at the start of the quarter.

Date Funded Status* Discount Rate
September 30, 2009 78.3% 5.20%
September 30, 2011 72.8% 4.54%
July 31, 2018 93.4% 4.11%
December 31, 2019 89.0% 3.20%
March 31, 2020 85.6% 3.39%

In addition to the higher discount rate, poor investment returns (-5.66%) over the quarter were also a significant factor in the decline in the funded status.

At the start of the second quarter, credit spreads began to narrow, and asset prices improved, but plan sponsors may continue to see an erosion in their funded status while the coronavirus holds economic growth hostage.

Most analysts expect interest rates to remain low through 2021, so improvements in funded status will have to come from a recovery in investment portfolios, in the absence of contributions. If plans can generate their median assumed 6.60% rate of return, Milliman calculates the Pension Funding Index could improve to 88.1% by the end of 2020.


*Source: Milliman Pension Funding Index. The Milliman Pension Funding Index is based on actual pension plan accounting information for the 100 largest defined benefit pension plans sponsored by U.S. public companies. The index is based on a ratio of the market value of assets compared to the projected benefit obligation (PBO), as a measure of the pension liabilities.