Monday, February 4, 2013

Impact of Low Rates on Pension Plans

The WSJ describes how the low interest rates impact the level of unfunded pension liabilities. The main channel is not the current low returns on pension assets, but the lower discount rates applied to present value future pension liabilities. Intuitively, comparing to a long term bond, the issue is not the reinvestment rate, but the long duration (=interest rate sensitivity) of the liabilities.

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