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

I’ve never been a boxer, but I can certainly appreciate the instructions to stay away from your opponent in the last or later rounds when you have the match won on points even though Jimmy Braddock didn’t adhere to that strategy in the movie classic, “Cinderella Man”.

Actuarial firm Milliman has released the results of its latest Milliman 100 Pension Funding Index (PFI) for August 2023, which analyzes the 100 largest U.S. corporate pension plans. According to its study, the funding ratio dropped from 103.6% at the end of July to 103.3% as of August 31, ending the month with a $43 billion surplus for these 100 plans. Unfortunately, asset losses for the month outweighed liability gains, which fell as a result of the 16 basis point increase (US interest rates were up!) in the monthly discount rate. According to Milliman, “the market value of PFI plan assets decreased by $27 billion because of August’s -1.55% investment return, while the monthly discount rate climbed from 5.25% in July to 5.41% for August.”

Given our expectation that the Fed hasn’t accomplished its primary goal of containing inflation, and we’ll get another update tomorrow, we expect US interest rates to keep rising. That possible increase will reduce the present value (PV) of those future liability promises (benefits), which will continue to improve funding without the need for further asset gains. Given the current level of funding (103.3%), why stick your chin out at this time when we all know that the markets can hit back with a fury! We’ve seen this movie unfold many times.

In the analysis provided by Milliman, they frame possible future scenarios for both interest rates and asset growth. “Under an optimistic forecast with rising interest rates (reaching 5.61% by the end of 2023 and 6.21% by the end of 2024) and asset gains (9.8% annual returns), the funded ratio would climb to 107% by the end of 2023 and 120% by the end of 2024. Under a pessimistic forecast (5.21% discount rate at the end of 2023 and 4.61% 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.” Why take the risk?

Increases in US interest rates have certainly negatively impacted the performance for total return-seeking fixed-income managers, but they’ve also dramatically reduced the PV of pension liabilities. Take advantage of these higher rates to SECURE the promises that have been made to your plan participants through a Cash Flow Matching (CFM) implementation. Witnessing another market correction that reduces your plan’s funded ratio back to the low 90% range or worse, depending on the magnitude of the correction, would be criminal. As we stated above, you’ve won the match. It is time to stay at least arm’s length away from your opponent!