News that the Federal Reserve raised the federalfunds rate for the first time in nearly ten years has so far hadlittle affect on long-term, high-quality corporate bond rates, thekey measurement to how sponsors of defined benefit plans pricefuture liabilities.

An increase in overall interest rates may ultimatelytranslate to an increase in yields on high-quality corporate bonds.That of course would be a welcomed development to sponsors ofcorporate pension plans.

But there is no automatic relationship between the fed fundsrate and corporate bond rates, explained Alan Glickstein, a seniorretirement consultant at Towers Watson.

“The question of how the fed’s rate increase affects pensionliabilities is a bit more complex,” said Glickstein. “ While anincrease in corporate bond rates does reduce liabilities, theoverall financial health of a plan also depends on how other assetsare performing.”

Proof of corporate bond rate yields’ autonomy from the fed fundsrate is evidenced by fluctuations in corporate yields over the pasttwo years, says Glickstein.

In 2014, the yield on the long-term high-quality corporate bondbenchmark rate dropped about 100 basis points, negatively impactingfunding ratios by adding to the cost of pensions’ futureliabilities, and thereby increasing sponsors’ fundingrequirements.

In 2013, the corporate rate increased about 100 basis points,providing a welcomed tailwind for DB sponsors.

Those fluctuations in corporate yields came independent of anychange in the fed funds rate.

“Corporate rates have bounced all over the place without anymovement from the fed,” notes Glickstein.

This year, the corporate bond rate have been less volatile,increasing 20 or 30 basis points, said Glickstein.

While an increase in the fed fund rate may not immediatelytrigger corresponding increases on corporate bond prices, thisweek’s rate hike is widely regarded as an indication that theFederal Reserve sees the overall economy strengthening.

It stands to reason that a strengthening economy wouldultimately be experienced in corporations’ revenues, which in turnwould increase yields on corporate bonds.

“If the fed’s indication proves to be true—and the economy isgetting better—then corporate rates will loosen up, and that willbe good for pension sponsors,” said Glickstein.

Just how good?

As a rule of thumb, Glickstein says that for every 100 basispoint move on the corporate bond rate, pension liabilitiesfluctuate 15 percent.

A bond rate increase of course means lower pension liabilities,which typically leads to improved plan funding status and lowerrequired annual cash infusions from sponsors.

Glickstein cautions that the rule of thumb is just that. “Someplans have higher interest rate exposure, making generalizationsdifficult.”

Plans that are well into a Liability Driven Investment Strategy,which lowers sponsors’ funding liabilities by pegging a plans’investment strategy to the cost of future liabilities, will haveless interest rate exposure, by design.

In the event that a plan has brought an LDI strategy tofruition, meaning its portfolio is completely invested infixed-income and produces returns in lock step to liabilities,interest rate fluctuation has virtually no consequence on fundingstatus.

Those plans are rare, says Glickstein, though more sponsors areinitiating an LDI strategy.

Just before the Fed raised interest rates, Moody’s released a report showing thatof the $700 billion increase in corporate pension liabilitiesexperienced between 2008 and 2013, almost half--$342billion—resulted from the falling corporate bond rate yield.

Moody’s expects the benchmark corporate interest rate to startclimbing by the end of the year, and projects it to reach 6 percentby 2019. In November, Mercer’s corporate benchmark yield was 4.18percent.

If Moody’s is right, the more than 175 basis point increase theyproject would greatly improve most pensions’ fundinglevels—presuming the rise in rates correlates with a strengtheningeconomy and equity markets.

Glickstein says it’s vital for sponsors to consider allcontingencies.

“The key is being prepared to respond to the economicenvironment and the pension implications, rather than predictingwhere you think the economy and interest rates are going to go,” hesaid.