US pension plans still haven’t
recovered from the 2008 financial crisis—and low interest rates may be to
blame, according to Russell’s Bob Collie.
“It’s been the liability side of the balance sheet—not the asset side—that has hindered the recovery.”Pension funding
levels remain “stubbornly poor” more than seven years after the peak of the
crisis due to liability increases, not falling asset values, the chief research
strategist explained in a blog
“At its low in March, 2009,
typical funded status (on a fully marked-to-market basis) had fallen by some
30%,” Collie wrote. “That was mainly the result of a sharp fall in asset
But while asset values have
since recovered, funding levels have not, he continued.
“Falling asset values dragged
funding down, but it’s falling interest rates that have kept it down,” Collie
argued. “It’s been the liability side of the balance sheet—not the asset
side—that has hindered the recovery.”
Had interest rates remained
unchanged, Collie said funded status would have fully recovered to pre-crisis
levels by 2014 based purely on the impact of investment returns. Even given the
decline in funding levels in the last two years, the average pension would
still be roughly 90% funded today.
Instead, funded status for US
pensions today is under 70%, showing little improvement since hitting 60% in
“The fall in the discount rate
has prevented the recovery in funded status that would have otherwise
occurred,” he argued.
And UK pensions are facing a
similar issue: Across the pond, pension liabilities are priced relative to bond
yields, which are at record lows following Brexit and the Bank of England’s
August interest rate cut.
Employee Benefits estimated that the aggregate deficit of UK private sector
pensions had risen to a record high of £390 billion ($513 billion) at the end
Persistently poor funding levels, Collie concluded, proved that investment returns alone were not enough.
“This highlights just how
important it is for the two sides of the pension plan balance sheet to be
managed together,” he said.
Source: Russell’s Fiduciary Matters Blog
Returns to Erase Years of US Public Pension Gains