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Despite Asset Class Returns, Pension Funded Status Decreases in the Second Quarter

Given pension funding discount rates declined over 30 basis points, the pension funded ratio declined to 88.0% from 89.7% at the end of the previous quarter. This data was for the 100 largest U.S. corporate pension plans included in the July 2019 Milliman 100 Pension Funding Index Survey. Based on the survey, the liability discount rate at the end of June was 3.45%, down from 3.78% from the end of March.  The June rate was also significantly lower than the 4.19% at the end of December 2018, when funding status was closer to 90%.  The current levels of the funding status could have been worse if not for the end of quarter rally in pension assets, which were about 3.0% higher on the quarter.

FTSE Pension Liability Index & Milliman 100 Pension Funding Index

At the peak of discount rates in September 2018, the pension funded ratio was 94.2%. This coincided with the 2018 tax deduction deadline that encouraged contributions. Since that time, funded status has been eroded by higher interest rates, although asset returns were about 4.8%.

Looking ahead, the Federal Reserve could decrease interest rates at their next meeting in July. Jerome Powell, the Fed Chairperson, expressed concerns about global growth, trade tensions, and the need for the Fed to remain flexible to keep the U.S. economy growing.  Barring a major change in trade policy, interest rates will probably remain low or move lower in the near future, putting more pressure on pension funding.

At current interest rates, pension funding will have difficulty reaching levels above 90% again this year without a significant move in asset prices. However, if pension assets could appreciate 6.6% for all of 2019 and 2020, the pension funding level could rise to 93.4% by the end of 2020, according to Milliman.

In the meantime, contributions play an important role in the funding equation, especially for plans on a de-risking glide path. As always, plans should periodically review their contribution policy and work with their investment consultant to develop a strategy to improve their funding status and create an investment profile that aligns with their goals and objectives, given the current market environment.


*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.