Pension plan sponsors should consider hedging labilities more evenly

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While COVID-19 dominated headlines, another tumultuous topic for corporate and other single-employer pension plans during 2020 was discount rates. Many plan sponsors are fully aware of how falling discount rates have resulted in larger liabilities and potentially lower funded statuses for their pension plans. What is driving the discussion now is the path of discount rates going forward. While many believe discount rates could rise in the future, current dynamics suggest this rise will be due to a steeper yield curve, which may actually result in a decrease in funded status for plan sponsors employing certain liability-hedging strategies.

While we believe robust liability hedging remains a bedrock of prudent pension risk management, given a heightened risk of yield curve steepening, plan sponsors should (re-)evaluate their asset/liability interest rate risk and reposition their liability-hedging portfolios as needed.