Two months of bond sell-off activity, which drove interest rates higher, has resulted in a reduction in benefit obligations for the Milliman 100 Pension Funding Index.
The Index, which examines the 100 largest defined benefit pension plans sponsored by U.S. public companies, markedly improved in June, even as the Federal Reserve announced the central bank will continue to wind down its bond-buying program and cautioned it will have no impact on its overall easy money policies designed to keep long-term interest rates down.
Fed policies and goals aside, the rise in benchmark corporate bond interest rates, used to value pension liabilities, allowed the 100 companies in the index to lower their obligations by $47 billion.
In June, pension liabilities decreased by $72 billion, bringing the index value down to $1.54 trillion from $1.61 trillion in May.
Even as June saw plan asset values decrease by $25 billion, due to an investment loss of 1.71 percent, year-to-date assets improved by $37 billion while the projected benefit obligation has been reduced by $175 billion, rendering nearly a $212 billion improvement in funded status and increasing the funded status ratio from 77.2 percent to 88.3 percent.
The crucial component and driver of the improvement this year has really been the rise in benchmark corporate bond interest rates.
“We’ve had a record year of funded improvement so far in 2013 and June continued that trend,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “I’ve been saying this for a while: It’s all about interest rates. The year-to-date asset improvement has helped, but it’s the reduction in benefit obligation—thanks to surging interest rates—that has gotten these 100 pensions much closer to 90 percent funded status than we could have imagined at the beginning of the year.”