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