Funded Status of US Corporate Pensions Rises $21 Billion in October

The funded ratio of the 100 largest US corporate pension plans rose to 85.1% from 84.4% in October thanks to a third straight monthly increase in the discount rate, which helped boost the funded status of the plans by $21 billion, according to actuarial and consulting firm Milliman.

The aggregate deficit of the plans, as tracked by the Milliman 100 Pension Funding Index (PFI), fell to $285 billion, which is its lowest level since March when it was $243 billion. The decrease was partially offset by a 0.93% investment loss, which caused the market value of the plans’ assets to decline by $20 billion to $1.629 trillion at the end of October. This is compared with a monthly median expected investment return of 0.53% during 2019.

“All eyes are on the presidential election this month, and what the results might mean for interest rates and investment returns going into year-end,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. “As discount rates tick back up for the third consecutive month, executives should be paying close attention to market movements coming out of this election cycle.”

Milliman also reported that the projected benefit obligation of the plans declined $41 billion during October to $1.915 trillion, which was attributed to a 14 basis point (bp) increase in the monthly discount rate to 2.71% from 2.57% at the end of September.

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The cumulative asset return for the plans over the previous 12 months through the end of October was 5.75%, during which time their funded status deficit widened by $42 billion and their funded ratio fell to 85.1% from 86.8%. The increase in deficit was attributed to an overall decline in the discount rate over the past 12 months from 3.08% to 2.71%.

Milliman projected that if the plans earn the expected 6.5% median asset return per its 2020 pension funding study, and if the current discount rate held steady through 2021, the funded status of the plans would rise to 85.6% by year-end and to 89.3% by the end of 2021. This is based on assumed aggregate annual contributions for 2020 and 20201 of $40 billion and $50 billion, respectively.

The firm also said that under an optimistic forecast that assumes robust annual returns of 10.5% combined with interest rates rising to 2.81% by the end of 2020 and 3.41% by the end of 2021, the funded ratio would surge to 87% by the end of 2020 and 103% by the end of 2021. However, under a pessimistic forecast that assumes meager annual returns of 2.5%, with discount rates falling to 2.61% at the end of 2020 and 2.01% by the end of 2021, the funded ratio would fall to 84% by the end of 2020 and 77% by the end of 2021.

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Tags: Corporate Pension, Corporate Pension Funding Study, Defined benefit (db) pension plans, Milliman, Pension Funding Index, PFI 100, PFS, Zorast Wadia

Japan’s Government Pension Investment Fund (GPIF) posted an investment return of 3.05% gross of fees during the second quarter of fiscal year 2020 to raise the asset value of the world’s largest pension fund to 167.536 trillion yen, or $1.62 trillion.

The fund is now $440 billion larger than the world’s second largest pension fund, Norway’s Government Pension Fund Global (GPFG), which currently has an asset value of roughly $1.18 trillion. To put that in perspective, the gap between the two is $20 billion more than the entire asset value of the largest pension fund in the US, the California Public Employees’ Retirement System (CalPERS), which is worth about $420 billion.

Foreign equities were the top performing asset class for the Japanese giant, returning 5.99%, or $25.89 billion, and just ahead of its benchmark, which returned 5.97% during the quarter. Domestic equities returned 4.93%, or $18.96 billion, but fell short of its benchmark’s performance of 5.17%. Foreign bonds returned 0.64%, or $2.01 billion, also below its benchmark’s 0.81% return, while domestic bonds returned 0.19%, or $730 million, just beating its benchmark’s return of 0.17%.

For the first half of 2020, the fund had a total investment return of 11.59%, or $168.45 billion. Foreign equities were also the top performing asset class during the first two quarters, returning 27.18%, or $98.59 billion, and surpassing its benchmark’s return of 27.11%, while domestic equities returned 16.42%, or $57.36 billion during the first half, but missed the benchmark’s return of 17%.

Foreign bonds returned 4.11% during the first half, or $13.01 billion, beating its benchmark’s 3.43% return, while domestic bonds lost 0.27%, or $600 million, but still beat its benchmark, which was down 0.32%.

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The strong performance during the first half of the year was a sharp turnaround from fiscal year 2019, during which the fund lost 5.2% due to the COVID-19 pandemic, and puts it on pace to be the fund’s best year ever, topping its record high return of 12.27% in 2014.

The asset allocation of the fund’s portfolio is 26.61% in domestic bonds, 25.88% in foreign equities, 24.06% in domestic equities, and 23.46% in foreign bonds. The figures are rounded off, so the sum of each does not necessarily equal 100%.