16 June 2019

Corporate Pension Funding Status Improves In June

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Over the past two months, bond sell-off activity, which drove interest rates higher, has resulted in a reduction in benefit obligations for the Milliman 100 Pension Funding Index.

The Index, which examines the 100 largest defined benefit pension plans sponsored by U.S. public companies, showed significant improvement in June, even as the Federal Reserve announced that it will begin to taper its bond-buying program. The Fed also made clear that it will continue to design monetary policies to help keep interest rates down.

The rise in benchmark corporate bond interest rates, used to value pension liabilities, has allowed the 100 companies in the index to lower their obligations by $47 billion. In June, overall pension liabilities decreased by $72 billion, bringing the index value down to $1.54 trillion from $1.61 trillion in May.

Even with asset value decreases in June of $25 billion, representing an investment loss of 1.71 percent, year-to-date assets improved by $37 billion while the projected benefit obligation has been reduced by $175 billion. This created a nearly $212 billion improvement in funded status and increasing the funded status ratio from 77.2 percent to 88.3 percent.

The crucial component and driver of the improvement this year has really been the rise in benchmark corporate bond interest rates.

“We’ve had a record year of funded improvement so far in 2013 and June continued that trend," said John Ehrhardt, co-author of the Milliman Pension Funding Study. "I’ve been saying this for a while: It’s all about interest rates. The year-to-date asset improvement has helped, but it’s the reduction in benefit obligation—thanks to surging interest rates—that has gotten these 100 pensions much closer to 90 percent funded status than we could have imagined at the beginning of the year.” 

-From an article by Michael K.Stanley, LifeHealthPro.com
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