US Funding Level Dips to Lowest Since 2003

(September 15, 2010) — Last month, the 100 largest US corporate defined benefit pension plans lost $17 billion in assets and saw liability increases of $91 billion, resulting in a $108 billion decline in pension funded status, a study by Milliman revealed. 

“It’s all about interest rates,” John Ehrhardt, Milliman principal, consulting actuary and co-author of the Milliman 100 Pension Funding Index, said in a news release. “For months we’ve been tracking how corporate bond interest rates are contributing to a ballooning projected benefit obligation. Combine this kind of interest rate activity with lackluster asset performance and what you have is the worst funded status in a decade.”

The funding ratio dipped 5.5 percentage points to 70.1%, according to Milliman’s 100 Pension Funding Index, the lowest level since May 31, 2003 when the solvency ratio was 70.5%. At the end of August, the pension funding deficit was $460 billion, down $108 billion from the previous month. Approximately $17 billion of the loss came from asset declines, as an increase in liabilities pushed funding levels to decline even further.

The report released by Milliman is the latest review of the impact of low interest rates on US pensions. According to the release, assets of the 100 plans decreased by a combined $17 billion to $1.08 trillion in August, while liabilities increased $91 billion to $1.54 trillion. As of August 31, the pension funding deficit increased to $460 billion.

Earlier this month, Mercer reported that due to simultaneously falling equity markets and interest rates, the deficit in pension plans sponsored by S&P 1500 companies increased by $76 billion to $506 billion at the end of August, the largest ever recorded by S&P 1500 companies and more than double their 2009 year-end deficit of $247 billion.