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

Milliman is reporting improvement in the funded status for the largest corporate plans. According to the Milliman 100 Pension Funding Index (PFI), corporate funding improved from 103.1% to 103.4% during May, marking the fifth consecutive monthly improvement to start 2024. Milliman attributed the improved funding to asset gains driven by the year’s best month at 2.29% driving the indexes assets up by $22 billion to $1.3 trillion. With the decline in the discount rate of 15 bps, pension liabilities grew by $18 billion and now stand at $1.25 trillion. According to Zorast Wadia, the discount rate used by Milliman is the FTSE Pension Liability Index, which is similar to ASC 715 rates. As a reminder, Ryan ALM, Inc. has produced ASC 715 rates since 2007. The $4 billion difference between pension assets and plan liabilities produced the 0.3% funding improvement.

Milliman’s monthly reporting also includes scenario testing. In the latest work, Milliman forecasts 2024 and 2025 interest rates and asset returns. In the optimistic case they forecast the discount rate at 5.88% at the end of 2024 and 6.48% at the end of 2025, while assets grow at 10.4% per annum during that time. If achieved, the funded status for the Pension Funding Index would ratchet up to 110% at the end of 2024 and 123% by 2025’s conclusion. These levels would rival what we had at the end of 1999, when Pension America should have defeased the liabilities.

A pessimistic forecast has the discount rate falling to 5.18% by the end of 2024 and 4.58% by December 31, 2025. Assets under this scenario produce only a 2.4% annualized return. If this forecast were to become reality, the PFI funded status would be 98% by the end of 2024 and 89% by the end of 2025. Since most of us have no clue where rates are going in the next couple of years, why play the game. Defease your plan’s liabilities at the current level of rates. We’ve seen too often greed creep into the equation instead of sound risk management. Use this opportunity to substantially reduce risk by matching and funding benefits and expenses with asset cash flows of interest and principal.