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Corporate Pension Funded Status Down Again in 2016, but Could Improve in 2017

Although interest rates rose at the end of 2016, the interest rate used to discount corporate pension liabilities ended the year lower than the level at the end of 2015. Correspondingly, pension liability valuation was higher on a year-over-year basis. According to the Milliman 100 Pension Funding Index survey of the 100 largest corporate pension plans, the 2016 year-end discount rate was 3.99%, which was lower than the rate at the end of December 2015 (4.16%), although it was above the lowest rate for the year (3.32% in August 2016). On the asset side, average annual gains in 2016 for the same plans fell short of expectations, and were about 6.17%, taking into consideration the impact of the Federal Reserve Bank’s rate increase in December. As a result, the funded status of these plans declined to 81.0%, which was lower than the level of 81.7% posted at the end of 2015.

Citi Pension Liability Index & Milliman 100 Pension Funding Index

Milliman goes on to note that if the Fed continues to raise interest rates in 2017, and the corporate discount rate rises 60 basis points to 4.59% in 2017, the average funded status could improve to 93%, assuming plans earned an average 7.2% return on their assets over the course of the year.