Corporate pension plan sponsors might finally have good news to consider as they set the discount rate they will use to determine the value of their liabilities, a research study by SEI said.
The 12th annual study, which analyzed a database of 688 pension plans, said the rise in interest rates since the start of 2013 gives plan sponsors a break from years of low rates. Higher rates cause the discount rate to go up and liabilities to shrink.
"Plan sponsors that have struggled with setting the discount rate for several years will finally see some relief as we end 2013," said Jonathan Waite, director, investment management advice, and chief actuary for SEI's Institutional Group. "Discount rates increasing 90 [basis points] will lower liabilities … which is welcome news after years of steadily falling rates."
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SEI said that assuming no major economic changes occur by the end of the year, pension plans that report results on Dec. 31, should consider increasing the discount rate they use. This week, the Fed announced it would slow its bond-buying program, which many experts say will cause interest rates to rise.
The study also analyzed returns on investment assumptions used by pension managers and found that the range of the assumptions was tight with the low and high ends slightly off from what occurred in 2013.
SEI cautioned that plan sponsors should be wary of using the investment return assumptions of others as a guide for setting their own. Rather, each plan should tailor its assumptions to its own asset allocations.
The data used for the study was derived from the 2012 SEI Plan Sponsor Accounting Database, which consists of data from Standard & Poor's Institutional Market Services database, as well as proprietary analysis created by SEI's Institutional Group.
SEI's Institutional Group provides outsourced fiduciary management investment services.
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