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Rising Interest Rates Enhance Corporate Pension Funding

The Milliman 100 Pension Funding Index Survey* reported the estimated pension funding for the 100 largest corporate defined benefit plans increased to 98.4% during the first quarter of 2021, which was at its highest level since 2007. The Index was revised to 90.3% at the end of December 2020.

In the survey, corporate pension liabilities declined by 9.11%, as the corporate discount rate increased to 3.12% from 2.46% at the end of 2020.

Following a steep decline at the start of the Covid-19 pandemic, most plans experienced a significant improvement in funded status as the year progressed. While overall discount rates are about 27 basis points lower, outstanding asset returns (+15.68%, annualized) propelled funding status levels from 86.7% at the end of March 2020.

Given expectations that the Federal Reserve will maintain the current interest rate policy at least until the end of 2023, if plan assets generated returns around 6% for all of 2021, pension funding could improve to 100.5% by the end of this year.

*Source: Milliman Pension Funding Index Survey, April 15, 2021, and Society of Actuaries.