An assessment of Russell Investments’ “$20 Billion Club,” an index tracking the largest private U.S. pension funds, finds “actuarial losses” had the most significant impact on pension performance during the last year.

Russell defines actuarial losses as those pinned to interest rates and mortality assumptions, among other factors. Since early 2014, both interest rate declines and updated mortality assumptions have seriously dampened mega-plan funded status, Russell says.

Russell’s $20 Billion Club comprises the 19 largest corporate defined benefit (DB) plans that together represent roughly 40% of the pension assets and liabilities of all U.S. publicly listed corporations. New Russell data shows these corporate DB plans have seen a ballooning projected benefit obligation hit their balance sheets in the past year, largely underpinned by the adoption of updated mortality assumptions for accounting/actuarial purposes.

These lackluster results come after a resurgent 2013 for large pensions. At the start of financial year 2014, Russell says, these mega-pensions faced a combined deficit of $114 billion, the lowest it had been since 2007.

“However, by the end of 2014, that figure had risen to $183 billion, hit by a double blow of an unexpected decline in interest rates and updated assumptions about how long retirees are expected to live,” Russell’s analysis explains. 

Russell says the impact of investment returns has actually been neutral or positive in every year for the past decade or so, discounting 2008’s meltdown. “Plan sponsor contributions outpaced new benefit accruals and hence had a steady positive impact over this period,” Russell adds. “The big headwind has come in the shape of ‘actuarial losses.’”

As explained by Russell’s Bob Collie, chief research strategist, Americas Institutional, yearly actuarial gains and losses can be traced largely to changes in interest rates. Falling rates lead to higher values being put on the liabilities, while rising rates lead to lower liability values. 

In 2014, the median discount rate used for U.S. plans fell by 0.83%, to 4.02%, pushing liabilities up and hurting funded status. In an added twist, this fairly sizable and largely unpredicted drop in interest rates came during the same year as significant changes in commonly used mortality tables that help plans make assumptions about life expectancy.

“The widespread adoption of newly published mortality tables added some $29 billion to the combined liabilities [of the $20 Billion Club], turning an already negative year into a significant setback,” Russell says.

Industry experts have noted that pension plans should expect more frequent mortality assumption updates—likely leading to additional funding stress. However, the Russell analysis goes on to suggest liabilities are about as high today as they will ever be, though knowing exactly when liability values may peak is tough.

“When interest rates rose in 2013, we concluded that liabilities most likely had indeed peaked and that they would never regain the high of 2012,” Collie says. “But that conclusion reckoned without the combined impact of a fairly sharp fall in interest rates and the speedy adoption of the new mortality tables. Together, those effects have led to a 2014 liability value that is even higher than 2012: against the odds, pension liabilities have re-peaked.”

Given this turn of events, Collie says Russell currently “offers no predictions as to whether 2014 now represents peak pension liabilities or whether liability values will go higher still.” The main source of uncertainty is actuarial gains/losses: the combined effect of the other variables (service cost, benefits, interest cost, and others) is relatively stable and can be expected to tamp down the combined liability value by perhaps $5 billion to $10 billion, or more if there is substantial pension risk transfer activity in 2015.

The $20 Billion Club was launched in 2011 and at the time represented 16 U.S. pensions meeting the minimum asset hurdle. Additional information and analysis is here.