A Look on the 2022 Market Interest Rates

How can we respond to rising interest rates?

1. Interest rates have been consistently rising since 2021: In the past three quarters alone, the rates of 10- and 20-year government bonds have risen over 2 bps. This rise, especially those of long-term interest rates, will have the good impact of lowering pension liabilities. However, too much of a good thing may not be a good thing: Specifically, the rise in interest rates may have unintended consequences on the company’s financials, such as having to report losses in the future due to the reversal of this trend.

To this end, the salary increase rate assumption can be used as a tool to soften this impact. This can take in the form of higher rates—even a temporary one for the next year or so—to make up for the lower liabilities in the present.

2. Companies—especially those whose pension plans lie at a critical funding level—should take advantage of the rise in interest rates by buying long duration bonds. Higher interest rates result in cheaper bond prices. Moreover, buying long duration bonds now will lock in the high interest rates and improve the funded status of your pension plans.

Of course, all these recommendations highly depend on the structure of your pension plans. Do you want to make the perfect move for your pension asset investments? Talk to your actuary today.