Pension Funded Status Up, While Risk Transfers Expected to Rise

Led by a decrease in plan liabilities, recent reports find that pension funded status improved in September, and that could help buttress a longer-term increase in pension risk transfer (PRT), according to another.  

Funded Status

The funded status of the 100 largest corporate defined benefit plans improved by $31 billion in September, says Milliman in its Milliman 100 Pension Funding Index. Willis Towers Watson and Aon also reported increases in September, albeit more modest ones. 

The $31 billion improvement is attributable to the drop in plan liabilities that resulted from higher corporate bond interest rates used to value them, says Milliman. And that increase, in turn, spelled an increase in the funded status surplus — which by the end of September stood at $122 billion.  

Not only did funded status improve, reports Milliman, so did the funded ratio of those 100 top plans. From Aug. 31 to Sept. 30, it rose almost three percentage points from 106.3% to 109.2%. And Aon's Pension Risk Tracker says that by the start of October, the funded ratio of pension plans run by the S&P 500 stood at 93.7%, a 0.7 percentage point increase from one month before.

And the improvements were not isolated to September, says Milliman — funded status  for the Milliman 100 improved by $36 billion in the third quarter of 2022. And their funded ratio rose by 3.3 percentage points in that quarter from 105.9% on June 30 to 109.2% three months later. 

Pension Risk Transfers

That improved funded status could auger well for increases in PRTs, MetLife has found in its 2022 Pension Risk Transfer Poll. MetLife reports that 89% of the plan sponsors it surveyed say they likely will consider a pension risk transfer in the next five years, and 35% say they will in the next two. 

Why? A majority — 59% — say that PRT makes sense when a plan is well-funded and requires little or no plan contributions and is not experiencing much immediate pressure to transfer risk. Further, a whopping 92% say that rising interest rates make it more likely that they would proceed with PRT plans. 

That would spell a continuation of a longer-term trend, according to MetLife, which says that in 2021 PRT sales hit a “record-setting” $38 billion. And, they say, in the 2022 poll 64% of plan sponsors expect the number of large PRT transactions to grow in the next five years.