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October a Treat for Pension Plan Funding

Practice Management

October was a treat, not a trick, for pension plan funding. Two recent reports have good news for pension plans and their participants and beneficiaries. 

Milliman reports that in its 100 Pension Funding Index—which measures the health of the 100 largest corporate defined benefit plans—the funded ratio rose to 98.1% in October. In dollars and cents, that spelled a $17 billion improvement. And that, they say, means that the index is coming closer to a funded status deficit of zero. 
 

Funded Ratio, September 2021 Funded Ratio, October 2021 Change, Sept.-Oct.
98.1% 97.2% + 0.9 percentage points


Source: Milliman Pension Funding Index, November 2021

October Three, which tracks two hypothetical defined benefit plans—one that is invested in a more traditional way and another invested in a conservative manner—similarly reports that pension finances improved in October. The traditional plan showed a 2% improvement; and the more conservative plan gained 1%. 

The market value of assets also improved in October, says Milliman, increasing by $31 billion; this, too, was due to investment gains.  The Milliman 100 PFI asset value stood at to $1.839 trillion by Halloween.

What Went Right? 

Milliman and October Three attribute October’s improvement in funded status to the stock market’s fortunes. Milliman cited investment returns Milliman called “robust,” and October Three says it is due to “resilient stock markets.” 

A Little Cold Water

Both firms threw a little cold water on enthusiasm about the improvement in funded status, however. Both report that along with the improvement in funded status, pension liabilities also grew. 

Milliman and October Three attribute the growth in pension liabilities to drops in the benchmark corporate bond interest rates and yields. And even here, October Three found a silver lining—they report that by their measure, even though long-term corporate bond yields fell more than 0.10% during October, they still are more than 0.3% higher than they were as 2020 was ending. 

Milliman also says that projected benefit obligations also grew in October, to $1.874 trillion, which was the result of a six-basis point drop in the monthly discount rate to 2.72%. 

Still, Good News for the Year So Far 

“Pension finances improved markedly in the first quarter of 2021 and, since then, plans have held on to most of this improvement,” says October Three. Both plans that it tracks, it says, are up for 2021 overall: the traditional plan by more than 11% and the conservative plan by 3%.
October Three also says that even though pension liabilities grew in October, they only did so by approximately 1%, and they still are down by 2%-3% for the year.