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Corporate Pension Funded Status Lower Over the Quarter, but Higher Over the Year

Lower liability discount rates were the primary contributing factor to the decline in corporate pension funded status during the fourth quarter. The 16 basis-point decrease in the liability discount rate had a greater impact to funded status than the 3.18% increase in plan assets, according to the Milliman 100 Pension Funding Index survey of the 100 largest corporate pension plans.

Citi Pension Liability & Milliman 100 Pension Funding IndexThe funded ratio was 84.1% at the end of December 2017, which declined from 84.3% at the end of September 2017. The corporate bond discount rate used to value pension liabilities declined to 3.53% at the end of the year (despite a Fed Funds rate hike) as compared to 3.69% at the end of the previous quarter. Over the full year, the corporate pension funded status improved from 83.3% at the end of 2016, when the discount rate at that time was 3.99%. Asset returns equal to 11.5% during 2017 more than compensated for the decline in the discount rate, which caused liabilities to rise about 10% over the year.

Milliman also provided projections; if pension discount rates hold at the current level and pension plan assets gain 7.0% return each year, the pension funded ratio could improve to 86.8% by the end of 2018 and 89.8% by the end of 2019. For their optimistic scenario, if the discount rate reaches 4.13% (60 basis points higher than the current level) by the end of 2018, the projected funded ratio could be 97% at that time. This assumes that plans achieve at least 7% return for assets, and the long end of the yield curve moves in line with 3 projected interest rate increases.

*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.