Despite Robust Returns, US Corporate Pension Funding Falls in July

Record-low discount rates erase 2.85% asset gains for the month.


A 39-basis-point drop in the monthly discount rate to a record-low 2.26% canceled out strong asset gains and lowered the funded ratio for the US’s 100 largest corporate pension plans to 81.1% at the end of July from 83.5% a month earlier.

According to consulting firm Milliman’s Pension Funding Index (PFI), the funded status of the plans worsened by $68 billion during July, while the deficit jumped to $388 billion as liability losses outpaced asset gains for the month due to a drop in corporate bond interest rates used to value the liabilities. The last time the funded ratio was this low was at the end of October 2016, when it was 79.0%. The current PFI funded ratio is down 8.7% from the start of the year, when it was 89.8%.

“July’s robust investment returns build on a strong second quarter for asset values,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement, “but it wasn’t enough to create funding gains given we’ve had four months straight of discount rate declines, culminating with the lowest discount rate in the 20-year history of our study.”

The average 2.85% investment return for the plans raised the Milliman 100 PFI asset value to $1.659 trillion from $1.618 trillion at the end of June. This was significantly higher than the median expected investment return of 0.53% during 2019 as reported in the 2020 Milliman Pension Funding Study.

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The projected benefit obligation (PBO) also increased during July, raising the Milliman 100 PFI value to $2.047 trillion, which is the first time the PBO has cracked the $2 trillion mark.

Despite robust asset returns of 9.53% over the last 12 months, the funded status deficit of the 100 largest corporate pensions in the US has ballooned by $178 billion thanks to tumbling discount rates. Discount rates have plunged from 3.37% at the same time last year.  

Milliman forecasts that the funded status of the surveyed plans will increase to 82.3% by the end of 2020 and 86.0% by the end of 2021 if the companies in its index were to earn the expected 6.5% median asset return per the 2020 pension funding study, and if the current discount rate of 2.26% were maintained through 2021. For purposes of the forecast, Milliman assumed aggregate annual contributions of $40 billion and $50 billion for 2020 and 2021, respectively.

Under an optimistic forecast that includes interest rates rising to 2.51% by the end of 2020 and 3.11% by the end of 2021, combined with 10.5% annual asset gains, the funded ratio would climb to 87% by the end of 2020 and 102% by the end of 2021. However, under a pessimistic forecast that includes discount rates falling to 2.01% at the end of 2020 and 1.41% by the end of 2021, with 2.5% annual asset returns, the funded ratio would decline to 78% by the end of 2020 and 72% by the end of 2021.

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CDPQ Loses 2.3% in First Half of 2020, Misses Benchmark

However, the C$333 billion pension beat its benchmark over the past five and 10 years.


The C$333 billion ($249.4 billion) La Caisse de dépôt et placement du Québec (CDPQ), which manages funds for Canadian public pension and insurance plans, reported a 2.3% loss in the first half of 2020. The fund underperformed its benchmark, which returned 0.8% during the same time period, due to overexposure to shopping center investments and underexposure to tech stocks.

“The exceptional monetary policies of central banks, coupled with historic support plans deployed by governments, have made it possible to prevent the recession from turning into a depression,” Charles Emond, CEO of CDPQ, said in a statement.  “But there is a growing dichotomy between the real economy and the financial markets.”

Over the past five years, CDPQ earned a 6.3% annualized return, edging out its benchmark’s return of 6.2% over the same time span. And over the past 10 years, CDPQ’s annualized return is 8.7%, compared with its benchmark’s 10-year annualized return of 8.4%.

The pension’s equity investments posted annualized five-year returns of 7.9%, surpassing its benchmark index’s five-year return of 6.9%, while its fixed income investments earned an annualized return of 4.5% over five years, ahead of the 3.8% its benchmark index returned during the same time period.  And during the first six months of the year, equities lost 5%, while fixed income generated a 4.1% return in a falling-rate environment.

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CDPQ’s real asset investments, which are comprised of its real estate and infrastructure portfolios, had an annualized five-year return of 5.4%, well off its benchmark’s five-year annualized return of 7.4%. And during the first half of the year, the asset class lost 7.3%, while the benchmark lost only 1.5%. The pension attributed the underperformance to its poorly performing investments in shopping centers and office buildings.

The real estate portfolio earned an annualized five-year return of 3.5% but tumbled 11.7% during the first half of the year. CDPQ said its property management subsidiary Ivanhoé Cambridge will transform its portfolio of shopping centers, which it said will require specific solutions for each of the assets, as well as its repositioning in market segments.

And CDPQ’s infrastructure portfolio posted a five-year annualized return of 8.2%, while losing 1% during the first half of the year. The pension said that the portfolio is showing resilience despite its exposure to the transport sector, where some facilities, including airports, grinded to a halt during the crisis.

“The quality of assets in sectors such as renewable energies and telecommunications, as well as the continuous support of portfolio companies since the start of the crisis, has enabled the portfolio to significantly limit the impacts of COVID‑19,” said CDPQ.

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