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

Milliman has once again produced the results of its latest Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans. As reported, the average funded ratio for the constituents in the index rose from 103.6% at the end of September to 104.2% as of October 31. The increase was driven by the continuing rapid rise in the discount rate which stood at 6.2% at the end of October which was up 36 bps from September 30th’s 5.84%. The increase in the discount rate was more than sufficient to make up for the asset decline of -2.68%. Assets have now declined for three consecutive months, while the 6.2% discount rate is at a level last achieved in 2009.

According to the study’s author, Zorast Wadia, the funded ratio of 104.2% marked a high level for 2023. Zorast also made mention of the fact that the recent increase of more than 100 bps in the discount rate during the last 4 months makes this a “very favorable economic environment for plan sponsors.” We agree. Who knows where rates will be in the next 6-12 months? Why try to time the market?

In addition to reporting on the current state of corporate America’s pension funding, the Milliman study framed possible scenarios for the end of 2023 and the conclusion of 2024. “Under an optimistic forecast with rising interest rates (reaching 6.3% by the end of 2023 and 6.9% by the end of 2024) and asset gains (9.8% annual returns), the funded ratio would climb to 106.0% by the end of 2023 and 118.0% by the end of 2024. Under a pessimistic forecast (6.1% discount rate at the end of 2023 and 5.5% by the end of 2024 and 1.8% annual returns), the funded ratio would decline to 103.0% by the end of 2023 and 93.0% by the end of 2024.

Given these possible outcomes, why take the risk of having your plan’s funded ratio fall from a healthy 104+% to something close to 93% or worse? Again, the primary objective in managing a DB pension plan should be to SECURE the promised benefits at a reasonable cost and with prudent risk. Subjecting the plan to unnecessary risk at this point with so many unknowns potentially impacting the capital markets is silly, if not fiduciarily imprudent. Secure those promises (benefit payments) at these attractive yields. You will have won the battle, if not the war.