PFI year-end discount rate settles at 2.46%, down 74 basis points, with
double-digit investment gains of 11.72% powering funding for the year
Forecast for end of year 2021 and 2022
The year 2020 was characterized by strong investment gains
alongside sharply decreasing discount rates that resulted in an
overall $50 billion increase of the funded status deficit. While
similar to the 2019 net asset and liability changes, 2020 had a
unique set of circumstances, namely the catastrophic impact on
people’s lives and the financial markets due to the COVID-19
pandemic. After experiencing steep declines in the first quarter,
asset returns roared back for the remainder of 2020 and limited
the funded status deterioration due to declining discount rates.
The funded status deficit of $234 billion at the end of December
was the lowest monthly funded status deficit recorded in 2020.
Discount rates have declined in seven of the last 10 years. The
Milliman 100 discount rates fell 74 basis points to 2.46% at the
end of 2020 from 3.20% at the end of 2019. The discount rate at
year-end 2020 was the lowest year-end discount rate and second
lowest monthly discount overall that has been recorded in the
20-year history of the Milliman 100 Pension Funding Index (PFI).
Net asset performance was well above the expected 6.5%
annual investment gain. During 2020, these pension assets
posted an annual return of 11.72% following the strong 2019
investment gain of 15.66%. By comparison, the 2020 Milliman
Pension Funding Study (PFS) reported that the monthly median
expected investment return during 2019 was 0.53% (6.5%
annualized). The year 2020 was very favorable for both fixed
income and equity investment classes, similar to 2019. The PFS
has observed investment returns above expectations in seven of
the last 10 years.
FIGURE 1: MILLIMAN 100 PENSION FUNDING INDEX PENSION SURPLUS/DEFICIT
FIGURE 2: MILLIMAN 100 PENSION FUNDING INDEX — PENSION FUNDED RATIO
With the year-over-year $50 billion funded status deterioration
noted above, the year-end 2020 funded ratio declined to 88.2%
from 89.8% at the end of 2019. While plan assets were up nearly
$125 billion for the year, plan liabilities increased $175 billion due
to the aforementioned declining interest rates.
The projected asset and liability figures presented in this analysis
will be adjusted as part of Milliman’s annual 2021 PFS, including
summarizing and reporting the most recent plan sponsor
Securities and Exchange Commission financials. The 2021 PFS
will also reflect reported pension settlement and annuity purchase
activities that occurred during 2020. De-risking transactions
generally result in reductions in pension funded status because
the assets paid to the participants or assumed by the insurance
companies as part of the risk transfer are larger than the
corresponding liabilities that are extinguished from the balance
sheets. To offset this decrease effect, many companies engaging in
de-risking transactions make additional cash contributions to their
pension plans to improve the plan’s funded status.
During 2020, the cumulative investment return was 11.72%
while the cumulative liability return (e.g., the projected benefit
obligation [PBO] increase) was 13.73%. The $50 billion funded
status drop during 2020 resulted in a year-end funded status
deficit of $234 billion.
Taking a closer look by quarter, 2020 was off to a disastrous
start as the investment return for the Milliman 100 plans began
with a loss, at -5.84% in the first quarter. The funded status
deficit worsened from $184 billion at the beginning of the year
to $243 billion by end of March 2020. The resulting funded ratio
was 86.2% as of March 31, 2020. Positive investment experience
ensued during the second quarter of 2020, but the funded status
further declined as discount rates continued their descent.
The funded ratio fell to 83.5% as of June 30 in spite of the
financial market rebound of the second quarter. The lowest
discount rate ever recorded in the 20-year history of the
Milliman 100 PFS of 2.26% occurred at the end of July. Despite this,
the funded status deficit improved by $14 billion during the third
quarter based on a continuation of positive investment returns and
as discount rates inched upward from their nadir. The funded ratio
stood at 84.4% as of September 30. The fourth quarter of 2020 was
by far the best quarter for pensions as assets posted above average
returns and further discount rate drops were limited. December’s
$34 billion increase in market value brings the Milliman 100 PFI
asset value to $1.747 trillion at year-end 2020. The Milliman 100
PFI liability value increased to $1.981 trillion at the end of
December 2020. The funded ratio climbed to 88.2% by the end of
the year, although behind where it started the year at 89.8%.
Pension plan accounting information disclosed in the footnotes
of the Milliman 100 companies’ annual reports for the 2020
fiscal year is expected to be available during the first quarter of
2021 as part of the 2021 Milliman PFS. We expect to publish our
comprehensive recap in April 2021 as part of it.
2020-2021 Projections
If the Milliman 100 PFI companies were to achieve the expected
6.5% median asset return (as per the 2020 PFS) and if the current
discount rate of 2.46% were maintained during 2021 and 2022,
we forecast that the funded status of the surveyed plans would
increase. This would result in a projected pension deficit of $152
billion (funded ratio of 92.2%) by the end of 2021 and a projected
pension deficit of $67 billion (funded ratio of 96.5%) by the end
of 2022. For purposes of this forecast, we have assumed 2021 and
2022 aggregate annual contributions of $50 billion.
Under an optimistic forecast with rising interest rates (reaching
3.06% by the end of 2021 and 3.66% by the end of 2022) and
asset gains (10.5% annual returns), the funded ratio would
climb to 104% by the end of 2021 and 123% by the end of 2022.
Under a pessimistic forecast with similar interest rate and asset
movements (1.86% discount rate at the end of 2021 and 1.26% by
the end of 2022 and 2.5% annual returns), the funded ratio would
decline to 81% by the end of 2021 and 75% by the end of 2022.
MILLIMAN 100 PENSION FUNDING INDEX — DECEMBER 2020 (ALL DOLLAR AMOUNTS IN MILLIONS)
PENSION ASSET AND LIABILITY RETURNS
About the Milliman 100 Monthly Pension Funding Index
For the past 20 years, Milliman has conducted an annual study
of the 100 largest defined benefit pension plans sponsored
by U.S. public companies. The Milliman 100 Pension Funding
Index projects the funded status for pension plans included in
our study, reflecting the impact of market returns and interest
rate changes on pension funded status, utilizing the actual
reported asset values, liabilities, and asset allocations of the
companies’ pension plans.
The results of the Milliman 100 Pension Funding Index were
based on the actual pension plan accounting information
disclosed in the footnotes to the companies’ annual reports for
the 2019 fiscal year and for previous fiscal years. This pension
plan accounting disclosure information was summarized as
part of the Milliman 2020 Pension Funding Study, which was
published on April 28, 2020. In addition to providing the financial
information on the funded status of U.S. qualified pension
plans, the footnotes may also include figures for the companies’
nonqualified and foreign plans, both of which are often unfunded
or subject to different funding standards than those for U.S.
qualified pension plans. They do not represent the funded status
of the companies’ U.S. qualified pension plans under ERISA.