US - The funded status of the 100 largest corporate defined benefit pension plans declined by $6bn during February 2011, research by Milliman shows.
The Milliman 100 Pension Funding Index (PFI) found the deficit increased to $255bn from $249bn at the end of January 2011 and marks the first monthly decline since last November. Prior to February 2011, the pension funded ratio had improved in four out of the last five months.
The actuarial and consulting firm said the funded status decline was due primarily to a decrease in the corporate bond interest rates used as benchmarks to value pension liabilities, Milliman said. Although financial markets performed well in February, investment gains were not enough to offset the pension liability increase. As of February 28, 2011, the funded ratio sat at 82.1%, down from 82.2% at the end of January 2011.
February's $15bn increase in market value brings the Milliman 100 PFI asset value to $1.167trn, up from $1.152trn at the end of January 2011. This increase was driven by an investment gain of 1.63% for the month. By comparison, the Milliman 2010 Pension Funding Study reported that the surveyed companies' 2010 median expected monthly investment return on pension assets was 0.65% (8.10% annualised).
The projected benefit obligation (PBO), or pension liabilities, increased by $21bn during February, raising the Milliman 100 PFI value to $1.422trn from $1.401trn at the end of January 2011. The change resulted from a decrease of 11 basis points in the monthly discount rate to 5.41% for February from 5.52% for January 2011.
Over the last 12 months to February 2011 the cumulative asset return has been 13%, but the Milliman 100 PFI funded status has dropped by $1bn as asset improvements have lagged liability increases. For these 12 months, the funded ratio of the Milliman 100 companies improved slightly from 81.0% to 82.1%.
Looking ahead at predicted performance for the rest of 2011, Milliman said: "If the Milliman 100 PFI companies were to achieve an 8.1% median asset return (as per the 2010 pension funding study) they expected for their pension plan portfolios and the current discount rate of 5.41% were maintained during years 2011 and 2012, we forecast the funded status of the surveyed plans would increase.
"This would result in a projected pension deficit of $230 billion (funded ratio of 84.0%) by the end of 2011 and a projected pension deficit of $175bn (funded ratio of 88%) by the end of 2012. For purposes of this forecast, we have assumed 2011 aggregate contributions to increase by 50% over their 2010 level. We have further assumed that 2012 aggregate contributions will increase by 50% over their 2011 expected level."
The report concluded: "Under an optimistic forecast with rising interest rates (reaching 6.51% by the end of 2012) and asset gains (12.1% annual returns), the funded ratio would climb to 107% by the end of 2012. Under a pessimistic forecast with similar interest rate and asset movements (4.31% discount rate at the end of 2012 and 4.1% annual returns), the funded ratio would decline to 71% by the end of 2012."
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