U.S. pensions continue to strengthen with the 100 largest corporate pensions moving into the black, according to a recent report. The corporate pension funded ratio climbed to 101.4%, says Seattle-based consulting firm Milliman, the highest in 13 years, recording a $24 billion funding surplus at the end of January.
It’s a continuation of good news that became sharply evident in 2021 when Milliman noted that the group of pensions had surged to 99.6% funded at year’s end, up from 90.3% at the end of 2020. The uptick is even more surprising as it happened during a challenging economy, a downturn in the market and a number of other factors brought on by the COVID-19 pandemic.
However, it was an increase in the benchmark corporate bond interest rates that are used to value pension liabilities, which led to an $82 billion liability improvement, offsetting the $54 billion drop in asset values from January’s market downturn.
“The discount rate climbed above 3.00% for the first time in nearly a year, lifting pension funding despite the market slide,” said Zorast Wadia, author of the Milliman 100 Pension Funding Index. “With the Fed likely to raise interest rates in Q1, we could see further liability decreases for these plans.”
Additionally, a recent report by Willis Towers Watson, which reviewed 361 of Fortune 1000 company pensions, found that this momentum is currently the norm with pensions at a 96% funding rate, on average, in 2021. The firm noted at the time that it was the highest level since the end of 2007 and logged a sharp increase from a 88% funding rate in 2020.
Milliman is bullish on pensions moving forward forecasting that even with rising interest rates–estimated at 3.67% by the end of 2022 and 4.27% by the end of 2023–and asset gains (10.2% annual returns), the funded ratio could climb to 116% by the end of 2022 and 134% by the end of 2023. Even with its more pessimistic forecast, which notes a 2.57% discount rate at the end of 2022 and 1.97% by the end of 2023 and 2.2% annual returns, the firm predicts the funded ratio would decline to 93% by the end of 2022 and 85% by the end of 2023.
Milliman monitors changes in pension liabilities and the market value of assets for multiemployer, corporate, and public defined benefit pension plans. Its study evaluates funded ratios, changes to liabilities, market value of assets, and pension expense for the 100 largest pensions of publicly traded U.S. corporations, while its corporate pension funding index reports on a monthly basis based on changes in prevailing interest rates and representative investment return indices.
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
