Pension funding for the 100 largest corporate defined benefit plans improved over the third quarter, according to the Milliman 100 Pension Funding Index Survey*. The index was 84.5% in September, compared to a revised 83.5% at the end of the previous quarter.
This improvement was driven by an increase in pension assets, which gained about 2.1%. Offsetting part of this gain, pension liabilities (PBO basis) rose about 0.9% during the third quarter due to a decrease in the liability discount rate from 2.65% to 2.57%. Over the quarter, the contraction in credit spreads contributed to the lower discount rate.
Liability discount rates have stabilized from the second quarter, when the Federal Reserve reduced interest rates in response to the Covid-19 pandemic. In March of this year, the liability discount rate was 3.39% and the Milliman 100 index was about 86.2%.
During the quarter, the Fed signaled interest rates will remain low, possibly until 2023. They don’t anticipate raising rates until inflation has risen to the 2% target over a consistent time period. Unfortunately, corporations should not expect any help from the Fed, and assets and contributions will have to work harder to plug gaps in funding for the next couple of years.
*Source: Milliman Pension Funding Index Survey, October 6, 2020, and Society of Actuaries.