More On January’s Liability Growth

According to Milliman, which produces regularly the Pension Funding Index (PFI), the top 100 US Corporate plans witnessed their pension plan funding deteriorate by $73 billion. The primary driver of this poor performance was the continuing fall in the discount rate. In fact, Milliman used a 2.85% discount rate, the lowest in the 20-year history of producing the PFI, and only the second time that the discount rate was below 3%.

The rate fell by 35 bps in January resulting in an increase in pension liabilities of $87 billion, which was only partially offset by asset growth of $14 billion during the month. The aggregate funded ratio fell to 85.7%. Milliman sees a way forward in which the funded ratio improves to 99% by the end of 2021, but that scenario would result only if pension assets grew by 10.6% in each of the next two years, with a corresponding rise of 60 bps in interest rates in both 2020 and 2021.

However, a further deterioration in the aggregate funded ratio of the top 100 Corporate plans to 73% would occur if U.S. long-rates continue to fall to 2.3% by the end of 2020 and 1.7% by 2021, while plan assets only grow at 2.6% each year through 2021’s conclusion. Since I’m not a betting man, I’d rather de-risk my pension plan to secure the plan’s Retired Lives, extend the investing horizon for the portfolio’s alpha assets to beat future liability growth, and improve liquidity to meet current benefit payments then forecast that rates will eventually rise and assets will not see a correction. What do you think?

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