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Rising interest rates could give corporate pension funding levels a major boost in the next three years, according to a new report from Moody’s Investor Services Inc.
If interest rates rise as expected, pension plans could be fully funded in as little as 36 months, according to the report released Monday.
The New York-based ratings agency predicts that Aa corporate bond interest rates will begin to rise in December and reach 6% by 2019.
If rates increase more than expected, pension plans could reach fully funded status in 18 months, Moody’s said in the report.
At the end of this year, Moody’s projects that U.S. nonfinancial corporate pension plans will be 78% funded, unchanged from the year before. The ratings agency expects pension plans to be underfunded by $450 billion, an improvement over last year’s $464 billion, according to the report.
Since 2008, pension plans averaged a 10% asset return per year, adding $895 billion to plan coffers. Employers contributed $448 billion in the same period, while benefit payments, plan amendments and other expenditures will have reduced the overall net increase in pension assets to $582 billion by the end of 2015, according to the report.
At the same time, increasing pension obligations and falling discount rates have weighed on pension funding levels.
“Since 2008, pension benefit obligations have increased significantly, with discount rates being a major contributing factor,” Wesley Smyth, Moody’s vice president and senior accounting analyst, said in a statement Monday.
“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,” Smyth said. “However, we believe companies have been managing this risk over the last several years by keeping voluntary contributions low.”
Moody’s also said it expects pension de-risking to accelerate as interest rates rise.
With a flat investment performance and interest rates holding about steady, the funded status of very large pension plans showed little movement in November, according to a Milliman Inc. survey released Monday