Corporate pension plans got much healthier last year on the strength of robust market returns, but those improvements may not last, Moody’s Investors Service warns.
The rating agency said that U.S. corporate pension liabilities dropped significantly in 2021, according to year-end financial reports.
However, these improvements may prove temporary, Moody’s said, because the pension deficit reductions “have been driven more by cyclical market conditions than by reductions in actual liabilities.”
Specifically, the report said that pension liabilities improved largely due to rising returns on pension assets and the effect of higher interest rates on the discount rates that are used to calculate pension obligations.
“The discount rate that is used to calculate the pension obligations will move in tandem with market interest rates, causing the calculated pension obligation to decrease as rates increase,” it said.
The prior period of extremely low rates drove a substantial increase in reported pension obligations over the past few years, Moody’s noted. “This trend of increasing pension obligations is reversing as interest rates rise,” it said.
The other side of the equation — pension assets — was bolstered by strong market returns in 2021. Now, as markets have turned, so will the asset picture.
“Given asset price declines year-to-date, pension funding may look worse in 2022 entirely because of asset changes in plans,” Moody’s said.
While some of the weakness in pension assets will be offset by the impact of rising rates, “the unknown is which of the these two variables will have the greater impact on 2022 funding,” Moody’s said.