The funded status of the 100 largest U.S. corporate defined benefit plans fell to 81.7% at the end of 2014, down 6.1 percentage points from the end of 2013 as liabilities rose faster than assets, a Milliman report shows.
Liabilities increased 11.96% to $1.8 trillion in 2014, partly the result of a 75-basis-point drop in the discount rate to 4%.
Within the overall increase in liabilities, Milliman found that 3.4 percentage points of it is attributable to plans that adopted the Society of Actuaries’ new mortality tables, which reflected longer participant life expectancies.
This number, while notable, is lower than the 6% to 8% increase that was predicted, said Zorast Wadia, principal, consulting actuary and co-author of the report, in a telephone interview. It’s possible that some plans are large enough to use their own customized mortality tables and were not impacted by the changes if they were using stronger mortality assumptions to begin with.
Investment returns were robust, but not strong enough to offset the increase in liabilities.
Assets rose 4.16% to $1.5 trillion in 2014, the result of a positive investment return of 10.9%.
Plans with higher fixed-income allocations, long duration in particular, posted higher overall returns (14.5% on average) than those with higher equity exposure, Milliman said, noting that declining interest rates in 2014 were a tailwind for fixed-income investments.
In fact, the report found that more plan sponsors are shifting to higher fixed-income allocations. Equity allocations fell to an average 37.3% at the end of 2014, the lowest allocation in the study’s 15-year history. Bond allocations increased to an average 42.7%, up from 39.54% the previous year.
Strong investment gains were further offset by lower company contributions. The companies surveyed made a total of $39.8 billion in contributions in 2014, the lowest level since 2008 and down $4.4 billion from 2013, most likely due to legislation that reduced the minimum required contributions, Milliman said.