The Silver Lining on Falling Bond Prices

Despite falling asset values, pension plans' funded ratios are soaring.

As interest rates rise and bond prices fall, companies are evaluating the effects on all aspects of their business—from their lines of credit to their pension plans. And although the drop in bond prices has lowered the value of assets in pension plans, the latest “Russell LDI update” points out that rising interest rates have had the opposite effect on plan liabilities. According to Bob Collie, chief research strategist for Americas international with Russell Investments, the reduction in liabilities has improved pension plans’ funded ratios, but some companies may have been too focused on the fall in asset values to notice the improvement.

“When corporations talk about the objectives of their pension plans, the objectives are based on asset versus liability, so net position,” says Collie. “But we find when it comes to month-to-month tracking or quarter-to-quarter reporting, those objectives may get set aside. Companies look at the fall in asset values and think that’s bad, but they may not the evaluate how their funding status moved.”


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