A rising rate environment may not be the worst thing for pension plans. Actions taken by the Fed affect short-term rates, but draw a less predictable path for the long end of the yield curve. Corporate pension plans have increased their fixed-income allocations as well as taken on more duration as the result of moving to LDI structures. Equity and overall plan returns have performed well in rising rate environments, ultimately improving funding ratios.
Split on bonds: Corporate plans have increased their bond allocations as more have adopted LDI strategies, while public plans have lowered bond allocations, as the need for returns has led them to riskier asset classes.
Longer view: Bond yields have shown to be less correlated with short-term rates farther out on the yield curve. The median corporate plan duration in 2016 was 13.2 years and the median public plan had a duration of 5.1 years, per P&I's plan sponsor survey.
Performance rises: Funding ratios, by their nature, will improve in higher-rate environments. Equity and total plan performance have, on average, outperformed amid rising rates.
*Yields of the Bloomberg Barclays U.S. Long Government/Credit Index. Sources: Milliman;
Bloomberg LP; P&I Research Center
Compiled and designed by Charles McGrath and Gregg A. Runburg