The funded status of the 100 largest U.S. corporate pension plans improved in December due to a rising discount rate, although the overall pension funding deficit for all of 2012 increased by $74 billion from the previous year, according to a monthly report by investment consultant Milliman.
The discount rate used to calculate pension liabilities increased 13 basis points in December to 4.18% from 4.05%, decreasing the overall projected benefit obligation for the plans to $1.748 trillion from $1.794 trillion.
The overall value for the plans as of Dec. 31 increased to $1.336 trillion from $1.328 trillion, giving the plans a total deficit of $412 billion and a funding ratio of 76.4%.
A year earlier, the plans had a pension funding deficit of $337 billion and a funding ratio of 78.7%.
The report cites historically low interest rates as the primary driver behind the drop in funding ratio.
“It's notable but not surprising we had a record low discount rate as far as year-ends,” said John Ehrhardt, principal and consulting actuary at Milliman and co-author of the report. “The 4.18% is the lowest we've ever seen.”
While the discount rate was higher than the historic low in July, “it was a negative year where again the rise in liabilities outpaced the asset gains,” Mr. Ehrhardt said.
The discount rate at the end of 2011 was 4.67%.
“Plan sponsors have had higher than expected rate of returns for three out of the past four years,” Mr. Ehrhardt said, but despite this, falling interest rates have increased liabilities at a faster pace.
Mr. Ehrhardt also said plan sponsors should expect to have to make the same level of employer contributions in 2013 that they did the previous two years since interest rates should remain extremely low.