Milliman: Investment gains, stable discount rate buoy corporate funded status

The 100 largest U.S. corporate defined benefit pension plans studied by Milliman saw their combined funding ratio rise to 75.5% in February, from 74.3% a month earlier.

The plans' combined deficit was $413 billion as of Feb. 29, a 4.6% improvement from the end of January attributed primarily to strong investment gains last month and a discount rate that dropped only one basis point to 4.25% at the end of February.

The combined asset value of the pension plans reached $1.276 trillion in February, up 1.9%, while the combined projected benefit obligation increased 0.2% to $1.689 trillion.

While the increase in funded status is significant, there is a lot of ground to gain following a second half of 2011 that saw the deficit double.

“We're at the highest level of liabilities that we've had in (Milliman's) 12-year history,” said John Ehrhardt, principal and consulting actuary at Milliman, in a telephone interview.

“The only way we're going to see a significant decrease in funded status is if we see a win-win” — an increase in discount rates and strong investment returns.

If the 100 plans were to achieve a median annual return of 8% and the current discount rate of 4.25% were maintained through 2012 and 2013, Milliman forecasts the funding ratio of the plans would continue to increase — to 79.9% at the end of this year and 85.4% at the end of 2013. The forecast also expects 2012-2013 aggregate contributions to the plans to increase by 40% from the 2010 level of $60 billion.

“If we're optimistic, we assume a win-win,” said Mr. Ehrhardt. “We assume discount rates go up to 4.75% at the end of this year and then 5.35% the following year and they get an extra 4% (return) on top of the 8% (assumed rate of return) that would get us back to 100% by the third quarter of 2013, under those very optimistic conditions.

“So that gives you an idea of how far we have to go,” he added.