S&P 500 companies with defined benefit pension plans continued to show improved funded status in September, as assets were up marginally along with rising discount rates, which reduce the present value of the plans’ future liabilities. Given the improved funded status, will corporate pension plans take some risk off the table? They should continue to reduce equity exposure in favor of bonds that can more effectively mirror the plans’ liabilities.
For public and multiemployer plans that discount plan liabilities at the ROA, the notion that rising interest rates are reducing plan liabilities is a foreign concept, which is why plan sponsors in those pension systems need to get more transparency regarding plan liabilities. With this enhanced knowledge comes the ability to have a more responsive asset allocation policy.