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

Milliman has published the results of the latest Milliman 100 Pension Funding Index (PFI) that reviews the funding for the 100 largest U.S. corporate pension plans. November wasn’t a great month for funding as the significant drop in the discount rate of 65 basis points (6.20% to 5.55%), the largest monthly decline since 2008, saw pension liabilities escalate by $82 billion. This hurdle was too much to overcome despite a stellar investment gain of 6.53%. The collective funded ratio dropped from 104.1% at the end of October to 103.2% as of November 30th.

The market value increase of $74 billion inassets was the best performance for the index in 2023. Collectively, the index constituents now have $1.302 trillion in assets. However, the $82 billion in liability growth resulted in funding deterioration of $8 billion during the month, leading to a decline in the surplus which now stands at $41 billion.

According to Zorast Wadia, author of the PFI. “All eyes will be on where interest rates and plan asset values end up in December, as this will lay the foundation for 2024 pension calculations for calendar-year plans.” As part of their monthly review, Milliman looks at the potential impact on funding from both an optimistic and pessimistic forecast.  Under an optimistic forecast with rising interest rates (reaching 6.2% by the end of 2024 and 6.8% by the end of 2025) and asset gains (9.8% annual returns), the funded ratio would climb to 117% by the end of 2024 and 131% by the end of 2025. Under a pessimistic forecast (4.9% discount rate at the end of 2024 and 4.3% by the end of 2025 and 1.8% annual returns), the funded ratio would decline to 93% by the end of 2024 and 85% by the end of 2025.

That is quite some gap in potential funding under those two scenarios. As we’ve been saying, given the uncertainty as to the Fed’s interest rate policies going forward, why make an interest rate bet by waiting? Despite the recent pullback in rates, we are still in a very supportive interest rate environment in which to take risk from your DB plan. SECURE a portion of the Retired Lives Liability today which will ensure that the liquidity necessary to meet the promised benefits is there, while extending the investing horizon for your growth or alpha assets. This extending investing horizon will help the pension plan wade through potential market turmoil. Plans that adopted a cash flow matching strategy in October have secured the pension promises at much more attractive rates leading to far greater cost reduction of those future benefits. Who knows what December holds, let alone 2024.