Not So Fast

DB pension plan funded ratios have been hurt through the last 15+ years by declining interest rates inflating the present value of plan liabilities (FASB and not GASB accounting).  With stronger economic growth exhibited earlier this year and a Federal Reserve that began tightening, the hope was that long-term rates would begin to back up fairly consistently providing some relief on the liability side of the pension equation.

But, alas, economic growth seems to have moderated, and despite the Fed’s action regarding short-term rates, long-term Treasury yields (10-years) have actually fallen about 35 bps in the last month or so (2.9% as of this morning). We got another indication that rates might not be rising as rapidly as economists had forecast, as the CPI for November was flat. When removing food and energy from the calculation, the CPI was up 0.2% on the month and 2.2% YoY, but has stayed within an annual range of 2.1% to 2.3% during the last 12-months.

Couple the declining interest rates with falling asset values, and you have an environment that is applying further pressure to the defined benefit universe’s funded status. With regard to asset values, diversification has been an impediment in 2018, as most equities outside of large-cap U.S. equities are significantly underperforming.

Most plans can’t afford a significant hit to their funded status as contribution costs have consistently escalated during the last decade-plus and many state and municipal budgets are already stretched. The volatility associated with contribution costs is one of the primary reasons that corporate America has exited this arena.

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