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Lower Rates over the Third Quarter Drive Funded Status Lower for Second Quarter in a Row

FTSE Pension Liability Index & Milliman 100 Pension Funding Index Interest rates used to value liabilities continued to decline again in the third quarter, continuing a trend seen throughout 2019. The September 2019 Milliman 100 Pension Funding Index Survey, which reviewed data for the 100 largest U.S. corporate pension plans, reported that the corporate discount rate was 3.09% in September 2019, which was down from 3.45% in June 2019, and was 110 basis points lower than the 4.19% level reported at the end of 2018.

The pension funding status reported by Milliman declined at the end of the quarter, to 85.4% from 88.4% at the end of the previous quarter and from 89.4% from the end of 2018. Even though asset returns were up about 12.05% year to date, this is because liabilities were up about 18.19% year to date.

It does not appear if corporate funding will improve anytime soon. The Federal Reserve cut rates two times in the third quarter, and there is a general expectation for at least one more rate cut in the fourth quarter. The lack of a trade deal between the U.S. and China could keep pressure on asset prices, possibly making it difficult for corporations to achieve their median expected return of 6.6% for pension assets. More than ever, contributions play an important role in improving funded status, and pension plan sponsors should periodically review their contribution policy with their investment consultant to develop investment strategy.