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Pensions

Here’s How Much Rising Rates Help Pension Plan Liabilities

Defined benefit planssee their obligations reduced, but there are also impacts on lump sum distributions, PBGC tabs and more.
By Larry Light


Rising interest rates may be a bane for the fixed-income section of pension plans’ portfolios. But the ascending rates tend to have a benign influence on pension liabilities. A study by NISA Investment Advisors sketches out how much, and also spotlights little-appreciated side effects.

Boosting long-term rates means that the liabilities, or the plans’ discounted value of future cash flows, decrease. All things being equal, this situation tends to produce the welcome result of enhancing plans’ funded status.

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By NISA’s calculations, the discount rate for a liability with a 12-year duration climbed to 5.6% as of October 31, up from 2.7% at year-end 2021. The result: a 28% decrease in the liability’s size. Assuming higher rates are with us for some time, lower liabilities should help plans in other ways, such as by decreasing the need for employer contributions.

That said, the study points out that there are “more nuanced ways rapidly increasing rates have impacted pension plans this year.” Thus, NISA wrote: “The rapid rise in rates experienced so far this year has clearly revealed some of the ‘hidden’ sensitivities of plans.” 

These mainly are welcomed by plan sponsors and even recipients, but some footwork may be required to achieve them.

One notable outcome concerns lump-sum payments to beneficiaries and how to time them. NISA compares the payout for someone who elects a lump sum this year, versus next year, in relation to a portfolio’s net present value. A 2022 lump sum would be calculated using rates from late 2021, which were lower. If that person waited until 2023, the lump sum would be harmed by the higher rates that began this year, which in discounted-cash-flow terms means a lower present value. Upshot: The 2022 lump sum would be roughly 35% more than for the 2023 payout.  

Another ramification of higher rates: the premium that corporate plans pay to the Pension Benefit Guaranty Corporation, which backstops beneficiaries if their company goes bust. The rate hikes impact the variable rate premium—the charge that the PBGC levies on unfunded vested benefits—which tracks prevailing interest rates directly. Plans that use a premium-figuring method based on one month would obviously be better off than those which employed one over 24 months, including a lot of time when rates were low.

When low rates were a given, opting for either one likely would not have made much difference. The problem now is that plans cannot switch agilely between methods. As NISA explained, corporate programs may switch “methodologies if they haven’t done so in five years, so a plan that last switched in 2018 wouldn’t be eligible to change again until 2023.”

Related Stories:

The Plus Side of Rising Interest Rates: Lower Pension Liabilities

Huge Turnaround Swings PBGC Multiemployer Program into the Black

U.S. Pension Funding Ratios Continue to Increase

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Home > News > Newsmakers > PBGC Provides Almost a Billion Dollars to New York Teamsters Pension
Newsmakers

PBGC Provides Almost a Billion Dollars to New York Teamsters Pension

The PBGC approved the grant money out of funding from the American Rescue Plan, for a struggling pension with over 30,000 participants.
By Paul Mulholland



The Pension Benefit Guaranty Corporation provided $963.4 million in assistance to a troubled pension fund operated on behalf of the New York State Teamsters Conference Pension and Retirement Plan, a union pension fund for workers in the transportation industry that is based in Syracuse, New York.

The pension fund provides benefits to 33,643 participants, but those benefits were cut in October 2017 by an average of 20% to approximately 25,000 of those participants due to a lack of funding.

According to a press release from the union, it applied for Special Financial Assistance, available through the American Rescue Plan Act of 2021, in July.

The SFA provision of the American Rescue Plan Act allows for PBGC funding for severely underfunded multiemployer pension plans. Those that receive assistance must monitor the money, and the interest it generates separately from other sources of funding. The PBGC also only accepts investment-grade bonds as an investment for the funds it provides.

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The union says its pension fund sought and received a grant for $918 million. The discrepancy between this figure and the figure provided by the PBGC accounts for the interest that has been accruing since the Teamsters first applied for relief back in January.

According to the release, the teamsters union expects the PBGC to deliver the grant by December 8, and monthly payments can resume by January 1, 2023. Make-up payments to cover participants’ losses from the last four years will be made on March 1, 2023.

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