By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Milliman released the results of its latest Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. They reported that July was a very strong month for pension funding as the PV of liabilities fell as interest rates rose (discount rate) and assets appreciated by 0.84%. The combination of falling liabilities and rising asset levels improved pension funding for the third straight month, with the average funded ratio now at 102.5%.

In addition, they provided both optimistic and pessimistic forecasts for 2023’s conclusion and 2024. “Looking forward, under an optimistic forecast with rising interest rates (reaching 5.50% by the end of 2023 and 6.10% by the end of 2024) and asset gains (9.8% annual returns), the funded ratio would climb to 109% by the end of 2023 and 122% by the end of 2024. Under a pessimistic forecast (5.00% discount rate at the end of 2023 and 4.40% by the end of 2024 and 1.8% annual returns), the funded ratio would decline to 100% by the end of 2023 and 91% by the end of 2024.”

The pessimistic forecast doesn’t seem to be that unrealistic. Given that possibility, why would corporate America risk the improved funding status? Secure the promised benefits at this time through a cash flow matching (CFM) strategy. You’ll be surprised by how little of the corpus would be needed to accomplish that objective. The balance of the assets can now be managed with the goal of maximizing the surplus. The pension industry has had a few opportunities during the years to de-risk en masse. Those opportunities were often not acted on. Let’s not allow that to happen again.