Recent data shows a decrease in the funded percentage of the largest US companies' pension plans for FY2023
The Milliman 2024 Pension Funding Study, covering fiscal year 2023, presents findings from the 100 US public companies with the largest defined benefit (DB) pension plans.
These companies disclosed their pension plan accounting information in the footnotes to their Form 10-K annual reports for the fiscal year 2023 and previous years. This edition marks the 24th annual review of these disclosures.
In 2023, the funded percentage of these plans decreased slightly from 99.4 percent to 98.5 percent. Concurrently, the pension deficit saw a significant increase, rising from US$8.5bn to US$19.9bn. The average return on investments was reported at 7.2 percent.
During the same period, the average discount rate experienced a decrease from 5.18 percent to 5.01 percent, while the average expected return on assets assumption moved up from 5.8 percent to 6.4 percent.
The total value of the pension plan assets of the Milliman 100 companies stood at US$1.32tn by the end of fiscal year 2023. These assets span multiple business sectors, including communications, healthcare, financial services, industrials, energy, technology, utilities, and others.
The 7.2 percent investment return did not fully offset the growth in liabilities, exacerbated by a 17-basis point reduction in liability discount rates.
This scenario led to a slight rise in the pension deficit, although it remained considerably lower than the deficits recorded between 2008 and 2020, which ranged from US$188bn to US$382bn.
The study also highlighted a significant development in the pension world with IBM's announcement in 2023.
IBM decided to stop making employer contributions to its US 401(k) plan and to reopen its defined benefit pension plan for employees, utilizing its significant pension surplus to cover retirement benefit contributions.
Comparison to the January 2024 edition of the Milliman 100 Pension Funding Index (PFI) showed that the actual funded ratio at the end of FY2023 was lower due to the lower actual investment returns compared to the projected returns.
This difference is partly due to the different methodologies used in the annual study compared to the projected monthly index, which aggregates plans with different fiscal year-ending dates and discount rates.
The Milliman study also notes the trends and expectations in pension funding, including investment returns, liabilities, and employer contributions.
Notably, the investment returns in 2023 were close to their long-term expected returns, and the actual dollar value of returns was nearly in line with the expected returns.
Despite the large asset loss in FY2022, plans' market-related values of assets were higher than their market values in FY2023, affecting the calculation of expected returns on assets.
Moreover, the liabilities were close to expected levels due to relatively stable discount rates. The expected increase in the projected benefit obligations was offset by contributions, pension settlements, and other adjustments, maintaining a near-stable funded status despite increased liabilities.
Pension expense reverted to being a debit on the income statement in FY2023, marking a shift from the pension income reported in the previous years. Employer contributions also decreased compared to FY2022, and the study recorded the lowest level of contributions since 2001.
As for the future, the study anticipates that the positive market returns early in 2024 might temporarily improve the funded status of these pension plans.
However, economic, and political uncertainties, as well as potential changes in interest rates, could affect their stability going forward. The possibility of companies reopening their defined benefit plans, as IBM did, could also influence future trends in pension management and funding.
