The recently approved second round of quantitative easing could further deteriorate the funded status of U.S. corporate defined benefit pension plans if long-term interest rates are lowered, putting continued funding pressure on companies, according to Mercer.
In the near term, lower rates on Treasury debt will bring down yields on high-quality corporate bonds used to discount pension liabilities.
However, if the second round of easing, known as QE2 and approved by the Fed last week, jolts life into the U.S. economy, the move could benefit pension funds in the long term.
“Higher interest rates, resulting primarily from a moderately higher inflation rate, would decrease pension liabilities,” Jonathan Barry, partner in Mercer’s retirement, risk and finance group, said in a news release. “At the same time, in a positive scenario, the value of plan assets could increase if the equities market improves as a result of improved business conditions and profitability.”