By: Russ Kamp, Managing Director, Ryan ALM, Inc.

For pension plans operating under GASB accounting standards it might come as a surprise to read that pension liability growth can be negative, but for those using FASB accounting standards they were once again reminded of that fact in September, and in a meaningful way! In fact, according to Milliman and the Milliman 100 Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans, liability growth was quite negative as a result of the 43-basis-point jump in the monthly discount rate, from 5.41% in August to 5.84% in September. The 5.84% is the highest discount rate since March 2010.

The dramatic rise in the discount rate more than offset the estimated asset investment loss of -3.73%, which according to the study was the worst performing month in 2023. Taken together, the average corporate funded ratio improved marginally from 103.1% at the end of August to September’s 103.6%, marking a peak for 2023.

As a reminder, liabilities are like bonds. They, too, are highly interest rate sensitive, and the present value of those liabilities can move in dramatic fashion as a result of interest rate shifts. Of course, rising rates can impact assets, but as witnessed in this case, only focusing on one side of the pension equation can mask what is truly occurring. Plan sponsors should want greater transparency into the fund’s liabilities (the promise made to participants). It is through this lens that more appropriate asset allocation decisions can be made.

In this environment of higher and higher US interest rates, plan sponsors have the opportunity to dramatically reduce the risk in their plans. Use these elevated rates to SECURE the promised benefits by cash flow matching liabilities as far into the future as the plan can afford. Let the funded status of the plan dictate the asset allocation. You’ll likely be pleasantly surprised by how much those future benefits now cost in present value terms.