Pension liabilities swelled by $133 billion in July, according to a new report.
Milliman Inc., Seattle, published this finding in its annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies. The Milliman 100 Pension Funding Index projects the funded status for pension plans included in the study, the plans reflecting the impact of market returns and interest rate changes on pension funded status. The study uses actual reported asset values, liabilities, and asset allocations of the companies’ pension plans.
The increase in pension fund liabilities, the study discloses, far exceeds a $13 billion investment gain. The increase has a resulted in a Milliman 100 PFI funded status deficit of $533 billion and a reduced funded ratio of 70.9%.
The report states the favorable investment gain was battered by a continued decline of interest rates on high-quality fixed income investments, which are the standard upon which pension liabilities are measured.
The funded status of the 100 largest corporate defined benefit pension plans dropped by $120 billion in July, as measured by the Milliman 100 Pension Funding Index (PFI). This was the largest funded status decrease ever recorded in the 12-year history of the Milliman 100 PFI.
The decrease, the report adds, follows a “dreadful” 2012 second quarter, when the funded status deteriorated by $186 billion. The deficit ballooned to a record $533 billion from $414 billion at the end of June.
January and March have been the only months of 2012 in which the discount rate didn’t decline from the previous month. As of July 31, the report states, the funded ratio fell to 70.9%, down from 75.6% at the end of June 2012.
The 2012 funded ratio is well below its December 31, 2011, value of 78.7%. The only other time that Milliman has witnessed a lower funded ratio was on May 31, 2003, when it bottomed out at 70.5%, the report states.
The projected benefit obligation (PBO), or pension liabilities, increased by $133 billion during July, raising the Milliman 100 PFI value to $1.831 trillion from $1.698 trillion at the end of June. A 40-basis-point decrease pushed the monthly discount rate to 3.92% for July, from 4.32% for June 2012. The 3.92% discount rate is the lowest ever recorded in the 12-year history of the Million 100 PFI.
The Milliman 100 PFI asset value increased by $13 billion during July, raising the Milliman 100 PFI value to $1.297 trillion from $1.284 trillion at the end of June 2012. The increase, the report notes, was due to investment gains of 1.22% for the month.