DB fund deficits blow out to near $100b for the month

America’s 100 largest corporate pension funds haemorrhaged US$95 billion in November alone, the highest monthly losses of 2008, after interest rate cuts and asset losses owing to global financial turmoil.

The assets of the defined benefit (DB) pension funds, as measured by the Milliman 100 Pension Funding Index, suffered losses of more than $30 billion during November.

But unlike in October, when liability decreases helped to offset the investment losses, a drop of more than 80bps in interest rates contributed to liability increases in November. The net result was that the funded status for the pensions sponsored by these companies fell by $95 billion.

John Ehrhardt, principal and consulting actuary with the New York office of Milliman, said November’s slide would result in a $60 billion hit to earnings in 2009.

Pension funding dropped to 84.7 per cent, an almost 20 percentage point decline from the funded ratio at the beginning of the year.

“In November, these pensions experienced their largest one-month drop in funded status so far this year,” Ehrhardt said.

“For comparison, although October had a larger asset drop ($120 billion), the funded status only declined by $58 billion.”

The funds’ 2008 net asset return is -23 per cent, as at November 30. The market value of their assets has plunged from $1.3 trillion in November, 2007 to $956 billion in November 2008.

According to Ehrhardt, if the pension funds in the index earn a 0 per cent return for the remainder of 2008, and discount rates remain at 7.64 per cent, their funded status is projected to decrease by another $7 billion.

“This would indicate a projected pension deficit of $180 billion at year-end and would mark a surplus loss of $241 billion for the year,” Ehrhardt said.

“This loss in funded status will result in a charge to corporate balance sheets at the end of the 2008 fiscal year and an estimated increase of $60 billion in pension expense for 2009.”

Market interest rates are used to discount future expected cashflows under international accounting standards (IAS 19) – resulting in a double-whammy of lower returns and rising liabilities for DB schemes around the world.