Despite Strong Equity Markets, Financial Health of Largest US Corporate Pension Plans Showed Modest Improvement in 2024

Despite the robust performance of equity markets in 2024, the financial health of the largest US corporate pension plans showed only a modest improvement. This trend, highlighted in the recent Milliman 100 Pension Funding Study, raises questions about the sustainability of these plans and the strategies employed by their sponsors.



The study found that the funded ratio of the Milliman 100 pension plans decreased slightly during FY2023 to 98.5% from 99.4% at the end of FY2022. This decrease was primarily driven by a 17 basis point decrease in liability discount rates, which amplified the growth in liabilities. Although the 7.2% investment return was positive, it was not enough to keep up with the growth in liabilities, resulting in a slight increase to the pension deficit from $8.5 billion to $19.9 billion.



This modest improvement in funded status is a concern for plan sponsors, as it indicates that even with strong equity market performance, the financial health of these plans is not improving at a significant pace. This raises questions about the strategies employed by sponsors and the sustainability of these plans in the long term.

One possible explanation for this modest improvement is the shift in asset allocation and investment strategy that many plans have undertaken in recent years. As shown in Exhibit 2, many plans have gravitated towards higher fixed income allocations, which has resulted in lower funded status volatility. However, this shift may also contribute to the modest improvement in funded status, as lower equity allocations may limit the potential for significant gains during periods of strong equity market performance.

Another factor that may contribute to the modest improvement in funded status is the relative size of gross pension obligations for individual companies. As the US and global economy have grown over the past 15 years, the relative size of these obligations has shrunk compared to the size of the plan sponsor as defined by the firm's equity market capitalization. This trend, highlighted in Exhibit 1, indicates that the economic growth has made the pension obligations relatively smaller compared to the size of the companies, reducing the financial exposure sponsors face from these plans.



Despite the strong performance of equity markets in 2024, interest rate fluctuations had a significant impact on the funded status of US corporate defined benefit (DB) plans. According to the Milliman 100 Pension Funding Study, the average discount rate decreased from 5.18% to 5.01% during the fiscal year 2023, which contributed to a slight increase in the pension deficit from $8.5 billion to $19.9 billion. This decrease in the discount rate caused the value of liabilities to rise more than the estimated rise in assets, leading to a marginal decrease in the funded status of the US corporate pension system from 107.0% to 106.6% in the third quarter of 2024.

In conclusion, despite the strong performance of equity markets in 2024, the financial health of the largest US corporate pension plans showed only a modest improvement. This trend raises concerns about the sustainability of these plans and the strategies employed by their sponsors. The shift in asset allocation and investment strategy, as well as the relative size of gross pension obligations for individual companies, may contribute to this modest improvement. However, interest rate fluctuations also played a significant role in the funded status of these plans. Plan sponsors should carefully consider these factors and evaluate their strategies to ensure the long-term sustainability of their pension plans.

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