Rising Rates Boosts Corporate Pension Funded Status by $38 billion

The aggregate deficit of the 100 largest US corporate pension plans fell by $38 billion during September to $269 billion. The funded ratio rose to 85.4% from 83.8% at the end of August, according to consulting firm Milliman.

Asset returns were relatively flat for the month at just 0.25%, leaving the $1.580 trillion market value unchanged from the previous month. The projected benefit obligation (PBO) decreased by $38 billion during September.

The discount rate for September was the second lowest discount rate recorded in the 19 years Milliman has been tracking the 100 largest corporate pension funds.

“While September was overall positive for corporate pensions, we’re not out of the abyss created by the historically low discount rates in Q3,” Zorast Wadia, said in a release. “In fact, over the past twelve months, discount rates have fallen by over 100 basis points. While asset returns may provide some relief, Q4 will turn out to be bleak for pensions if interest rates don’t improve.”

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During the quarter ending Sept. 30, the funded status deficit widened by $64 billion, as plans experienced consecutive record low discount rates in August and September. Although the aggregate value of assets increased by $18 billion during the quarter, plan liabilities surged by $82 billion..

Milliman said that if the 100 companies in the report were to earn their expected 6.6% median asset return, and if the current discount rate of 3.09% holds through 2020, the projected pension deficit would fall to $253 billion by the end of 2019.he funded ratio would rise to 86.3% and 89.9% by year-end 2019.. The forecast assumes aggregate annual contributions of $50 billion.

The forecast could be improved further by a return to a rising interest rate environment, however, markets are pricing in the potential for further rate cuts.