Projected interest rate hikes in 2017 are unlikely
to dig corporate pensions out of the hole.
The US Federal Reserve announced on December
14 its intentions to raise rates throughout 2017. But experts don’t
see this making much difference for struggling pensions.
“It is not just the increase in rates that matters
but the increase relative to what is priced into the market,” said Bob Collie,
chief research strategist at Russell Investments’ Americas institutional
division. “If interest rates go up only at the rate the market expects, that
will not help pensions at all.”
Though a sustained low-interest rate environment
makes retirement provision difficult, many factors have to combine for pension
plans to see improved funded ratios, Collie indicated.
“The single biggest factor in pension funding levels
is interest rates,” Collie said. “But the FOMC [Federal Open Market Committee]
raising rates does not automatically mean pension funding will go up.”
The ultra-low interest rates since 2008 have been
detrimental to corporate pensions, whose liabilities are valued based on
“Defined benefit pensions of US and European
companies have seen their funding gaps worsen since the onset of the crisis,”
according to an International Monetary Fund report. “This reflects a combination of low asset returns
(especially on safe assets, such as sovereign bonds) and falling interest
“We looked at the largest pension plan
sponsors in the United States, those with pension liabilities exceeding $20
billion,” Collie continued. “We have seen (the) pension funded status of this
$20 billion club hasn’t really recovered since 2008.”
Although markets and interest
rates usually have the largest impact on funded status, the current
environment means that moving the needle is going to require company
contributions, he added.
“[Even as] the stock market has increased past
pre-crisis levels… [low] interest rates have held back pension funded status,”
he said. "When you analyze how (the) funded status has moved since 2008,
it’s pretty clear that interest rates have been the reason most plans are still
not back to a strong funding position.”
According to Collie, plans won’t see strong
funding positions any time soon, despite climbing interest rates on the
“When it comes to pension funds, the math is pretty
simple,” he explained. “When interest rates are low, it is more expensive
to put aside money for retirement."
IMF Calls for Fund Manager Stress Tests; Projected Rate Hikes Likely Fall Short for