Moody’s: Fed Rate Hike Boon For Non-Financial Corporate Pensions


On Wednesday, the Federal Reserve announced its first rate hike in 9 years.

The move could help to eliminate billions of dollars in unfunded liabilities from the books of non-financial corporate pensions, according to Moody’s.


Credit rating agency Moody’s estimated the move would “help eliminate” roughly $450 billion from US non-financial corporate pensions’ total unfunded liabilities.

“One indirect policy effect [of ultra-low rates] was increasing pension benefit obligations because of lower discount rates,” Moody’s Senior Accounting Analyst Wesley Smyth wrote in a research note. “Since 2008, our rated issuers’ obligations have risen by $703 billion to around $2.1 trillion. We estimate that $342 billion of this increase was driven by lower discount rates.”

Brad Smith, a partner in NEPC’s corporate pension practice, said the decision to raise rates is a welcome one for pension plans for this reason. As for the asset side, Smith said pensions were unlikely to make drastic allocation changes in the wake of the announcement, having already prepared for interest rates to go up.

“Our clients, for a long time, for the past six to nine months, have been waiting for the Fed to take action,” he said. “A lot of the managers have positioned their portfolios for a rate increase.”

View the Moody’s report here [subscribers only].


Photo by Sarath Kuchi via Flickr CC License

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