Nearly half of the $700 billion increase in corporate pension liabilities since 2008 resulted from falling interest rates, according to Moody's Investors Service.
In a new report, Moody's said that while U.S. nonfinancial corporate pension liabilities “increased significantly over the past several years,” by some $703 billion, to an estimate of $2.1 trillion by the end of this year, much of that increase came from lower discount rates—$342 billion, in fact.
Assets have brought average returns of 10 percent annually since 2008, but in spite of that, the report said, funding levels still haven't hit 80 percent.
At the end of 2015, it added, U.S. nonfinancial corporate pension plans sponsored by its rated issuers “will be underfunded by $450 billion.”
But increases in interest rates could turn that around in as little as 36 months, the report said, “[i]f rates and asset returns behave as expected.”
The ratings agency also expects corporate interest rates to begin to increase in December, and projects that they will reach 6 percent by 2019. Should interest rates rise more than expected, it said that only 18 months would be sufficient to fully fund plans.
“As Moody's treats underfunded pensions as a debt-like liability, a funding level of 100 percent would benefit leverage metrics, a credit positive,” the agency said.
The report also anticipated an acceleration of pension plan derisking as interest rates increase. “If discount rates far exceed current expectations and plans become overfunded, plan sponsors could become vulnerable to the risks of surplus cash sitting in pension trust funds,” Wesley Smyth, a Moody's vice president–senior accounting analyst, said in a statement. “However, we believe companies have been managing this risk over the last several years by keeping voluntary contributions low.”
The report predicted that “sponsors will not increase contributions significantly above what is required by law and risk trapping cash in pension plans.”
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