Waiting FOR RATES TO RISE

By Steve Richards

​With the 10-year Treasury yield hitting an all time low on Tuesday it seems a good time to reflect on the impact of such low yields on DB plan de-risking and terminations.

The efficacy and timing of de-risking moves basically comes down to where one thinks interest rates are going. The conventional wisdom for years now is that rates are heading up, and most think that pulling the trigger on buying annuities and/or offering lump sums is just not a good idea. Why? Because as rates go up the price of Single Premium Group Annuities (SPGAs) go down. Likewise, the cost of lump sums.

Obviously, this conventional wisdom has largely proved wrong.

​What’s worse is that these could be the good old days when plan sponsors will look back and say to themselves: “Boy, I sure wish we had made those de-risking moves way back when…” Especially if equity markets tank, always a risk.
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10-Yr Treasuries vs FTSE Pension Liability Index vs 10-Yr Bund Since 2010

Crazy right? Well, if you’re like me you spend too much time watching the 10-year go up and down day after day, waiting for rates to “normalize”. No more need for MAP-21, HAFTA, and the like.

But it just isn’t happening, and apparently we should stop thinking it will anytime soon. In fact, every so often you hear a smart fixed income guy talking about how even U.S. Treasuries could be at zero in five years like the German Bund today.

Doom and gloom? Go look at your TV and you’ll see it in real time. What’s particularly fascinating to an old econ grad like me is that it is always impossible to anticipate the risks that are going to come along and impact things so unexpectedly. Coronavirus?

I guess that’s why they call it de-risking.

Next up: Could rates used to calc Pension liabilities go negative, and if so what would happen?