February Volatility Wipes Out $71 Billion in US Corporate Pension Funding

Falling discount rates, combined with market volatility, erased $71 billion in funding from the 100 largest corporate pension plans in the US in February, according to actuarial and consulting firm Milliman. As a result, the funded ratio for the plans fell from 85.5% to 82.2% for the month, the lowest level in more than three years. The funded level is now down nearly 10% from the same time last year when it was 91.9%.

“February was a rough month for corporate pension funding, and March is shaping up to be no better,” said Zorast Wadia, author of the Milliman 100 Pension Funding Index (PFI), which tracks the funding status of the plans. “COVID-19 fears and the drop in oil prices are driving steep market declines, which, when combined with the continued record-low interest rates, would indicate that March will likely be another dismal month for corporate pension funding.”

The poor funding performance for the month was due to the discount rate dropping to 2.69% in February from 2.85% in January, which set a record for the lowest rate ever recorded in the 20-year history of the PFI. Making matters worse, the plans’ market value shed $28 billion as a result of the falling stock market as the plans’ investments declined 1.48% during the month to an aggregate asset value of $1.602 trillion. Since the beginning of the year, the deficit for the PFI plans has ballooned by $147 billion.

The projected benefit obligation, or pension liabilities, for the plans rose to $1.949 trillion at the end of February. And over the 12-month period from March 2019 to February 2020, the cumulative asset return for the plans has been 10.1%, however, their funded status deficit widened by $214 billion as a result of the steep decline in discount rates during most of 2019, which has continued into 2020. Discount rates one year ago were 4.08% compared with 2.69% as of Feb. 29—a 139 basis point drop.

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Milliman said that, under an optimistic forecast with interest rates rising to 3.19% by the end of 2020 and 3.79% by the end of 2021, with annual asset gains of 10.6%, the funded ratio would rebound to 94% by the end of 2020 and 110% by the end of 2021. However, under a pessimistic forecast, with discount rates falling to 2.19% by the end of 2020 and 1.59% by the end of 2021, and with annual asset returns of only 2.6%, the funded ratio would decline to 77% by the end of 2020 and 71% by the end of 2021.