Year in review
The funded status of corporate pension plans experienced a 12.1% boost in 2022 despite investment returns for the year of -13.53%. Increasing discount rates and the corresponding liability (e.g. the projected benefit obligation) decrease of 22.57% more than offset the asset losses, resulting a funded status improvement of $172 billion for the year. This gain was comparable to 2021’s $183 billion funded status improvement where both plan assets and liabilities had contributed to the improvement; 2022, however, shaped out quite differently.
In 2022, corporate pension plan assets fell significantly as both equity and fixed income asset classes posted double-digit negative returns. The massive interest rate hikes seen in 2022 dampened the effects of diversification in investments that plan sponsors had been accustomed to. The PFI discount rate rose 242 basis points in 2022, ending at 5.22% as of December 31 compared to 2.80% at the end of 2021. For reference, the discount rate at year-end 2022 was the highest in over a decade. Discount rates have had net increases in five of the last 10 years.
Assets underperformed during 2022, posting a cumulative annual return of -13.53%, partially offsetting the above-expected returns over the prior three years. The monthly median expected investment return during 2021 was 0.48% (5.9% annualized) as reported in our 2022 Milliman Pension Funding Study (PFS). Investment returns have been above PFS expectations in seven of the last 10 years.
Overall, the year-end 2022 funded ratio soared to 110.0%, up from 97.9% at the end of 2021. While plan assets lost $321 billion for the year, plan liabilities decreased $493 billion due to the aforementioned discount rate increases. The resulting $172 billion funded status gain during 2022 lifted the year-end funded status surplus to $133 billion. The last time the Milliman 100 plans had a surplus at year-end was in December 2007, at $68 billion.
The projected asset and liability figures presented in this analysis will be adjusted as part of Milliman’s annual 2023 PFS including summarizing and reporting the most recent plan sponsor SEC financials. The 2023 PFS will also reflect reported pension settlement and annuity purchase activities that occurred during 2022. De-risking transactions generally result in reductions in pension funded status since the assets paid to the participants or assumed by the insurance companies as part of the risk transfer are larger than the corresponding liabilities that are extinguished from the balance sheets. To offset this decrease, many companies engaging in de-risking transactions make additional cash contributions to their pension plans to improve the plan’s funded status.
Highlights
| $ BILLION | ||||
| MV | PBO | FUNDED STATUS | FUNDED PERCENTAGE | |
|---|---|---|---|---|
| November | 1,492 | 1,342 | 150 | 111.2% |
| December | 1,465 | 1,331 | 133 | 110.0% |
| Monthly change | (27) | (11) | (17) | -1.2% |
| YTD Change | (321) | (493) | +172 | 12.1% |
Note: Numbers may not add up precisely due to rounding
Figure 1: Milliman 100 Pension Funding Index — Pension surplus/deficit
Figure 2: Milliman 100 Pension Funding Index — Pension funded ratio
Quarterly review
Corporate pensions saw funded status gains at the end of each quarter in 2022.
- At March 31, discount rates had already risen 82 basis points to 3.62%, immediately causing plan liabilities to fall. The market value of assets also fell, with investment returns of -4.79%, but this decline was not nearly as much as liabilities. During the first quarter, the funded status improved from a deficit of $39 billion to a surplus of $52 billion, with the funded ratio landing at 103.2% as of March 31, 2022.
- Further discount rate increases ensued during the second quarter of 2022 and the funded status improved further as plan liabilities declined. The funded ratio improved to 105.9% as of June 30 despite heavy second quarter market losses of nearly 8.00%.
- The funded status surplus increased another $30 billion during the third quarter, boosted again by liability reductions due to increasing discount rates that reached 5.36% at quarter’s end. While July finally offered a strong investment return of 3.36%, the subsequent two months posted heavy losses. The funded ratio settled at 108.8% as of September 30.
- The fourth quarter of 2022 was the only quarter where plan assets posted above average returns, on the order of 3.74%. Discount rates hit their peak at the end of October, reaching 5.71%, but dipped back down to 5.22% by the end of the year. The Milliman 100 PFI funded ratio climbed to 110.0% as of December 31, approximately 12.1% ahead of where it started off 12 months ago.
Pension plan accounting information disclosed in the footnotes of the Milliman 100 companies’ annual reports for the 2022 fiscal year is expected to be available during the first quarter of 2023 and will be published, along with our comprehensive recap, in April as part of the 2023 Milliman PFS.
2023-2024 projections
If the Milliman 100 PFI companies were to achieve the expected 5.9% median asset return (as per the 2022 PFS), and if the current discount rate of 5.22% remained unchanged during 2023 and 2024, we forecast that the funded status of the surveyed plans would see a slight improvement over the next two years. The pension surplus is projected to increase to $154 billion (funded ratio of 111.7%) by the end of 2023 and to $175 billion (funded ratio of 113.4%) by the end of 2024. For purposes of this forecast, we have assumed 2023 and 2024 aggregate annual contributions of $20 billion.
Under an optimistic forecast with interest rates rising 60 basis points each year (reaching 5.82% by the end of 2023 and 6.42% by the end of 2024) and asset returns of 9.9% each year (4.0% higher than the 5.9% median expected investment return from the 2022 study), the funded ratio is expected to climb to 124% by the end of 2023 and 139% by the end of 2024. Under a pessimistic forecast with similar interest rate reductions (4.62% at the end of 2023 and 4.02% by the end of 2024) and asset movements (1.9% annual returns), the funded ratio is expected to decline to 100% by the end of 2023 and 91% by the end of 2024.
Milliman 100 Pension Funding Index - January 2023 (all dollar amounts in millions)
Pension asset and liability returns
About the Milliman 100 monthly Pension Funding Index
For the past 22 years, Milliman has conducted an annual study of the 100 largest defined benefit pension plans sponsored by U.S. public companies. The Milliman 100 Pension Funding Index projects the funded status for pension plans included in our study, reflecting the impact of market returns and interest rate changes on pension funded status, utilizing the actual reported asset values, liabilities, and asset allocations of the companies’ pension plans.
The results of the Milliman 100 Pension Funding Index were based on the actual pension plan accounting information disclosed in the footnotes to the companies’ annual reports for the 2021 fiscal year and for previous fiscal years. This pension plan accounting disclosure information was summarized as part of the Milliman 2022 Pension Funding Study, which was published on April 28, 2022. In addition to providing the financial information on the funded status of U.S. qualified pension plans, the footnotes may also include figures for the companies’ nonqualified and foreign plans, both of which are often unfunded or subject to different funding standards than those for U.S. qualified pension plans. They do not represent the funded status of the companies’ U.S. qualified pension plans under ERISA.