US Corporate Pension Funding Level Rises to 91.4% in April

The 100 largest US corporate defined benefit pension plans’ funded status increased $29 billion to 91.4% in April from 89.7% at the end of March, spurred by strong investment gains and a rise in the benchmark corporate bond interest rates used to value pension liabilities, according to consulting firm Milliman.

April’s healthy 1.09% investment gain increased the plans’ aggregate asset value by $13 billion to $1.536 trillion at the end of April. Meanwhile, the plans’ aggregate deficit fell to $145 billion from $174 billion at the end of March, a result of an increase in the benchmark corporate bond interest rates.

“Overall, 2019 is starting out quite well, with above-expected asset returns in each of the first four months of the year,” Zorast Wadia, co-author of the Milliman 100 PFI report, which tracks the 100 largest defined benefit pension plans, said in a release. “Discount rates making their way north of 4.0% again would further add to the optimism around pension funding.”

The projected benefit obligation for the plans decreased $16 billion during April to $1.681 trillion due to a seven basis point increase in the monthly discount rate in March.

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Over the last 12 months, the cumulative asset gain for the pensions has been 5.19%, and the funded status deficit has grown by $5 billion. Milliman said the main reason the funded status deficit worsened was because of a decline in discount rates over the past 12 months. During that period, discount rates fell to 3.85% at the end of April from 4.03% at the same time last year. The funded ratio of the Milliman 100 companies slightly decreased over the past 12 months to 91.4% from 91.6%.

The report said the funded status of the surveyed plans would increase if the pensions were to earn the expected 6.6% median asset return, and if the current discount rate of 3.85% were maintained through 2020. Milliman said this would result in a projected pension deficit of $105 billion, and a funded ratio of 93.7% by the end of 2019, and a projected pension deficit of $43 billion, and a 97.4% funded ratio by the end of 2020. This is assuming 2019 and 2020 aggregate annual contributions of $50 billion.

Under an optimistic forecast with interest rates at 4.25% by the end of 2019, and 4.85% by the end of 2020, combined with annual asset gains of 10.6%, the funded ratio would climb to 101% by the end of 2019, and 117% by the end of 2020. However, under a pessimistic forecast with a discount rate of 3.45% at the end of 2019, and 2.85% by the end of 2020, and with just 2.6% annual returns, the funded ratio would fall to 87% by the end of 2019, and 80% by the end of 2020.

US Corporate Pensions Will Likely Miss Return Assumptions

Tags: Corporate Pension, Funded Ratio, Milliman, Pension

The US-China trade conflict will surely expand inflation, said John Williams, president of the New York Federal Reserve Bank.

“If there were a further escalation in terms of tariffs those effects would get even larger,” he said in a Bloomberg TV interview Tuesday, where he didn’t provide any hard numbers. “This starts to affect consumer prices as these tariffs are applied more broadly. The consumer sees it in prices paid in stores. That’s a significant effect.”

Williams, as New York Fed chief, occupies one of the most influential posts at the central bank. Previously the head of the San Francisco Fed, he has been associated with the dovish camp advocating lower rates. But in the recent past, he has seemed to be more hawkish.

With President Donald Trump’s decision to boost tariffs on $200 billion in Chinese merchandise to 25% from 10%, and Beijing’s retaliation in kind on $60 billion in American goods, the odds are that US prices will escalate. Just how much remains an open question.

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This is a significant issue for the Fed, which has put its rate hikes on hold while it awaits more economic developments. Trump on Tuesday renewed his urging for the Fed to lower rates, as a tactic to ease any burdens on Americans.

Overall, Williams did not sound overly alarmed. Central banks must get ready for an era of slow growth and subdued interest rates, he told a panel at a conference in Zurich Tuesday.

“Central banks should revisit and reassess their policy frameworks, strategies, and toolkits, to maximize efficacy,” he said, given a global environment where high savings rates and relatively low investment keep down interest rates.

Right now, inflation is a tame 2% annually as of April. And unemployment last month was at a 49-year low, 3.6%.

Tags: Donald Trump, Economic Growth, Federal Reserve, Interest Rates, Jerome Powell