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Investment Returns Outweigh Lower Discount Rates During the First Quarter of 2019

The pension funded ratio of the 100 largest U.S. corporate pension plans ended the first quarter at 89.7% which was marginally higher than a revised, year-end level of 89.4%. Asset returns were responsible for the improvement; corporate pension plans achieved approximately 6.31% return on assets, according to the most recent Milliman 100 Pension Funding Index survey. Meanwhile, the liability discount rate ended the quarter at 3.78%, which was down from 4.19% at the end of 2018.

FTSE Pension Liability Index and Milliman 100 Pension Funding Index Overall, in the past year, corporate pension plans have seen their funded status weaken. Six months previous, the funded ratio was over 94% (a 2018 high). Since that time a combination of lower investment returns (particularly in the fourth quarter of 2018) and lower discount rates have worked against funding levels.

It should be noted that Milliman updated lump sum window settlements and pension risk transfer activity in their analysis, which ended 2018 at a higher level of activity than previously expected. The current survey also observed a higher-than-anticipated level of corporate contributions in 2018.

If discount rates remain steady through 2019 (as it appears the Federal Reserve will halt interest rate increases for at least the remainder of the current year), Milliman anticipates corporate pension plans could see further improvement in their funded status (to 93.7%) if they achieve the median 6.6% expected level of asset returns.

Milliman also completed their annual pension survey for 2018, and several observations were noted. Corporate pensions continued to increase contributions, which were over $1 billion for some of the largest pension plans. In addition, a number of corporations revised life expectancy assumptions down slightly (resulting in lower pension obligations), based on recent analysis by the Society of Actuaries. Finally, pension risk transfers remained relevant as an effective mechanism to reduce plan administrative expenses and PBGC premium payments. For 2018, risk transfer activity was approximately $18.8 billion, compared to $12.7 billion for the previous year.

*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.