Uptick in interest rate helps improve DB fundingNews added by Benefits Pro on July 11, 2014

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By Nick Thornton

Reduced pension liabilities, along with better-than-expected returns on investments, help to improve employers’ defined-benefit plan funding last month, according to Milliman’s Pension Funding Index.

The funding status of the 100 largest corporate plans improved by $14 billion in June, lowering their aggregate deficit to $252 billion from $266 billion in May.

Projected liabilities decreased by $3 billion, explained in part by an increase of 2 basis points (0.02 percent) in the monthly discount interest rate, which now sits at 4.08 percent. According the Milliman, this was the first monthly increase in the discount rate since November of 2013.

The discount rate is used to value corporate bonds, which are used to value pension liabilities. A drop in the rate tends to increase liabilities.

Pension plans also realized an increase in assets by $11 billion in June, or a gain of 1.06 percent, to put the overall value of aggregate pension assets at $1.45 trillion. That gain outpaced expectations. By comparison, Milliman’s average monthly expected return in 2013 was 0.6 percent.

As of the end of June, overall funding ratios rose to 85.3 percent, up from 84.5 percent in May, but still down from the December 2013 level of 88.3 percent.

June was the first month in 2014 that saw a rise in interest rates, noted John Ehrhardt, co-author of Milliman’s 100 Pension Funding Index.

“Interest rates continue to be the story with these pensions,” he said.

Year-to-date, aggregate liabilities increased by $122 billion. The funded status of 85.3 percent by the end of June was down slightly from the level of funding by the end of March.

During the first half of 2014, discount rates dropped by 60 basis points (.60), accounting for the reduction in funding levels from the end of last year.

Milliman is projecting the funding status for the next year to improve if plans average a 7.4 percent return and the discount rate stays the same, at 4.08 percent.

Originally published on BenefitsPro.com
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