How Will Lower Interest Rates Affect Your Pension Plan?

The downgrading of the U.S. debt by Standard & Poor, and the related Federal Reserve response, has triggered even lower interest rates.  This is bad news for pension plans.  Lower interest rates result in greater (higher) present value of liabilities, which means Pension Plans are more underfunded.  However, those pension plans that have already implemented a Risk Reduction Strategy will benefit from the current situation because they do not have to worry about interest rate changes. 

The Federal Reserve will keep rates low for several years. Now is the time to take risk off the table in your pension plan.  In 2008 and 2009, some plans were literally decimated by the market.  But, you can manage your contributions going forward with confidence. So why take risks? If your pension plan does not have a Risk Reduction Strategy in place, it is important to implement one.  

Where do you start?  The best way is to hire an actuary and work with an investor who understands Risk Reduction Strategies. In the universe of investors, it is important to work with a pension plan investor.  This is a very different approach. A personal money investor may be good for individuals, but that doesn’t mean that they understand pension plans. 

The time horizon for plan termination is now longer.  With low interest rates, the potential for an employer to terminate a sufficiently funded plan in the near future is low. Protect you pension plan with a Risk Reduction Strategy and realize more peace of mind. 

 

John Markley