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Despite Negative Asset Class Returns, Pension Funded Status Increases in 2018

Thanks to higher liability discount rates, the pension plan funded ratio of the 100 largest U.S. corporate pension plans ended 2018 at 89.9%. The liability discount rate ended the year at 4.19%, which was higher than the 3.53% discount rate at the end of the previous year. Unfortunately, the plans in the January 2019 Milliman 100 Pension Funding Index survey lost 2.77% on the asset side of the funding equation, which limited the funding status improvement from 87.6% at the end of 2017.

FTSE Pension Liability Milliman 100 Pension Funding Index However, financial markets upset the corporate pension asset/liability balance over the fourth quarter. The funded ratio was a disappointment from 94.4% at the end of the third quarter; the liability discount rate only increased by 1 basis point, and asset returns were down about 4.2% over the fourth quarter.

As part of the year end survey, Milliman also projected funding out to the end of 2019 and 2020. Assuming discount rates hold (which could be possible if the Federal Reserve halts rate hikes, as many analysts are assuming) and plans are able to return their median expected rate of return of 6.8% per year (assuming a portfolio that is not on glide path de-risking), their funded ratio could improve to 93.4% by the end of 2019 and 97.0% at the end of 2020.

For plans that are on a de-risking glide path, expected returns would be significantly lower and the path to full funding will be slower. Regardless of the asset allocation, plans should review their contribution policy and work with their investment consultant to develop a strategy to not only improve their funded status but also create an investment profile that aligns with their goals and objectives.


*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.