By Jim Saft
(Reuters) – One of the overlooked victims of the fall and fall of interest rates are corporate pension plans which are facing a ballooning liability even as returns stay tepid.
That’s because market rates play a key role in valuing pension plan liabilities, and the lower they go the tougher things get for underfunded plans.
This may, over time, become a real issue for equity markets, as investors realize that purchases of shares bring not just a right to benefit from future streams of earnings but also the responsibility to meet potentially huge future streams of retiree payouts.
This is a big and growing problem, and a widespread one, with companies in the mature economies like the U.S. and Britain among the worst affected. The combined pension fund deficit of 1500 leading U.S. companies hit a record $689 billion in July, according to consultants Mercer, rising by $146 billion in that month alone. That leaves the companies just 70 percent funded.
Similarly, defined benefit pension plans in Britain, those which promise a certain payout, had a combined deficit of $416 billion, according to the UK Pension Protection Fund. Nearly 84 percent of such plans have a funding deficit.