Low interest rates are bad for pension funds

iTulip.com – Corporate Pension Fund shortfalls weigh on recovery:

Corporate pension funding shortfalls are a major operating cash flow problem for the corporations that experience shortfalls because by law corporations must finance pension funds to 100% over time. Pension fund shortfalls were problematic for most companies even before the financial crisis. Post crisis, the number of pension funds that are not 100% or better funded has increased from 67.6% in FY 2008 to 92.7% in FY 2009 ending in June. The median funded level is a mere 46%.

The pension funding shortfalls crisis initially appeared between 2002 to 2003 from a combination of falling stock prices and interest rates. The combination turned thousands of previously fully funded pension plans into underfunded plans.

An environment of low interest rates and low stock prices is a double whammy for pension funding because the net present value of liabilities increases as the net present value of assets falls.  As bad as the 2002 to 2003 period was for pension funds, the current crisis is nearly three times worse from a returns perspective, with no letup in sight.

That’s not the worst of it. According to the same source 81% of private medical pensions are underfunded with 65% containing no assets at all.