Pension Plans Feel Long-Term Rate Drop

Lower long-term interest rates have begun to hurt pension plans, adding to the funds’ liabilities, according to a report Wednesday from Mellon Financial Corp., which tracks the health of pension plans in the U.S.

Pension liabilities, the amounts the plans will pay retirees, behave like bonds. As with bonds, pension liabilities are a series of cash flows known to have a high degree of assurance -- think of the monthly payments retirees with a traditional pension get. Also like bonds, the current value of those future cash flows goes down as rates go up and vice versa.

As interest rates rose in the first five months of the year, led by Federal Reserve hikes of short-term interest rates, pension liabilities shrank.

But long-term interest rates, which do not always move in lock step with the short-term rates set by the Federal Reserve, have edged 0.4% lower since early June as investors have grown concerned about a slowing economy. Those lower long-term rates have bruised pension funds, according to Mellon.

The percentage of a typical U.S. pension plan’s liabilities that are covered by its assets fell in August as the value of those liabilities rose 3.5%, Mellon said.

Still, despite three consecutive months of deteriorating pension plan finances, the average plan’s funded status was better at the end of August than it was at the beginning of the year, primarily because of rate increases during the first five months of the year.

The assets of a typical plan were 5.1% higher at the end of August than they were at the beginning of the year.