What Effect Will Falling Interest Rates Have on DB Plans?

Valuation interest rates already were falling this year, and the drop has accelerated in March, says a recent report that also discusses what this may mean for defined benefit plan participants.

October Three reports that valuation interest rates have fallen approximately 90 basis points since Jan. 1, and almost 50 more since March 1.

In addition, says October Three, there are three factors that exacerbate the effect of this trend:

• ERISA Minimum Funding. They argue that declines in the market will reduce minimum funding valuation interest rates and force liability valuations higher.
• De-Risking. October Three suggests that rate declines may make de-risking “considerably cheaper” than in the future.
• PBGC Variable-Rate Premiums. Lower market interest and lower asset values can make the variable-rate premiums the Pension Benefit Guaranty Corporation charges higher.

Coupled with the drop in the stock market, declines in interest rates and asset values “will have significant consequences for DB plan sponsors,” says October Three, as well as DC plan participants.