(April 24, 2013) – Unprecedented employer contributions and bull equity markets were no match for ballooning liabilities last year: corporate pensions closed 2012 with record funding shortfalls.
But there is hope.
Seattle-based actuarial/consulting firm Milliman tracks 100 of the largest corporate plans in the United States, and saw an uptick in average funded status for the first quarter of 2013.
“The funded ratio has gone from 77% at the end of last year to just under 83% at the end of the first quarter, which is about as strong of a rally as we could hope for in this persistent low interest rate environment,” said John Ehrhardt, a Milliman principal and co-author of the report.
In March, these 100 pensions together showed a net $29 billion reduction in funding shortfalls. Assets increased by $15 billion due to investment returns plus contributions, and liabilities dropped by $14 billion.
The reduction in benefit obligations was largely due to the median actuarial discount rate rising from 4.16% to 4.22%, according to Miliman’s analysis. Discount rates were still offset from the median rates used in 2010 (5.44%) or 2011 (4.78%).
Milliman’s report warned plan sponsors not to expect the opening-quarter rally in discount rates to persist throughout the remainder of the year.
“Because the Federal Reserve has announced that it plans to keep interest rates low through 2014 (and perhaps longer, until the overall unemployment rate reaches 6.5%), there is little expectation that rising discount rates will contribute to improvements in the funded status of the Milliman 100 pension plans,” the report said.
A Towers Watson consultant, Dave Suchsland, took a tone of cautious optimism in discussing similar data released by his own firm. “Obviously, there is a long way to go until the end of the year, but funding ratios are moving in the right direction,” Suchsland said. “If interest rates don’t continue their rise and equity returns weaken, plan sponsors may need to pour more cash into their plans to improve funded status for the full year.”