We ran across terrific information from Milliman– the bulk of our analysis comes from the following fantastic White Paper:
With Copyright approval just this Monday – we can finally bring this great information to you- yay
While it may seem like we talk about interest rates and their effects constantly, there are very few things especially in the shorter term that effect an economy more and therefore economic growth and capital markets.
Good News for Pension Plan Owners and Recipients
In this higher interest rate environment, we have some really good news for not only pension plan recipients but the owners of pension plans as well. Higher interest rates help pension plan funding (see periodic table looking chart for the top 100 pension plans), in the forum of what’s called smaller present value obligations (PBO). While we understand the calculus of this equation it’s far too difficult to explain in this context but from a very high level, higher interest rates the effect of computation of PBO and the higher the rates, the lower the funding amount needed.
Said another way, pension plans generally hold large amounts of bonds and bonds are earning more now.
By taking a look at figure 3 from the fantastic white paper of Milliman, it’s easy to see that in 2007 the slashing of interest rates to levels never seen before caused a dramatic loss in pension plan funding. Not only did this funding drop but again by referencing the chart it’s easy to see that this was almost a 1 1/2 decade hurdle that pension plans fought against to regain their funding level.
Fast forward to today, again our Chart 3 favorite, shows pension plans are making a strong comeback in their obligations and with interest rates higher look to be fantastically and happily funded. This should be comforting to corporate pension plans (again looking to our periodic chart for those) that likely are breathing easier, and this should also be comforting from those pension plan recipients that maybe had concerns on the long term funding ability of their plan.
Given the full funding of Pension plans, we would infer the lump sum window may be closed! Those lucky enough to have offers over the last decade and a half, well done!
Have a Great “Funded Positive Interest Rates Pensions” Day!
John A. Kvale CFA, CFP
Founder of J.K. Financial, Inc.
A Dallas Texas based fee only
Financial Planning Total Wealth