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Discount Rates, Pension Funded Status Down

Practice Management
Discount rates fell again in July, according to two recent reports. And while the reports differ on funded status for the month, they broadly agree on the year’s trend.
 
“All-time low discount rate” is the characterization Milliman used concerning the rate as it stood after the July results in its latest Pension Funding Index analyzing the 100 largest U.S. corporate pension plans. And River and Mercantile Solutions reported in its monthly update that discount rates fell “sharply.”
 
Both Milliman and River and Mercantile found that discount rates in July fell by 39 basis points since June. Milliman had reported that unlike the previous two months, the average accounting discount rates fell by 11 basis points (bps) in June.
 
Both also note that the drop is a continuation of a trend. “July’s discount rate eclipses the previous discount rate low observed in June and once again sets a new record for lowest discount rate observed in the 20-year history of the Milliman 100 PFI,” says Milliman. River and Mercantile also said that the July drop was a continuation of a trend. “The story from June continued in a magnified manner in July,” they note.
 
They may agree that the discount rate fell substantially in July, but Milliman and River and Mercantile differ regarding the effect on pension funded status. Milliman said that in its index, the funded ratio “plummeted” to 81.1% in July. More specifically, for the top 100 corporate pension plans in their study, funded status fell $68 billion.  River and Mercantile, on the other hand, said that most plans “probably saw their funded status stay the same” in July.
 
River and Mercantile attribute their funded status finding to “strong returns” in equity markets in July—which they say for some has resulted in their being where they were at the start of 2020. Milliman, too, noted that the markets have been recovering, calling the investment returns for the 100 plans it studies “robust” in July, and said that asset returns in July were “above average,” and building on “a strong second quarter of returns.”
 
Despite their variance on July funded status, both studies agree that the overall funded status trend in 2020 is one of decline. Milliman says that the funded status of the companies in its study has dropped from 88.2% to 81.1% in the last 12 months. River and Mercantile says that because interest rates have fallen this year, funded status “has most likely deteriorated” so far in 2020.