Archived Insight | October 25, 2022

High Interest Rates Raise Model Plan’s Funded Status

During the third quarter of 2022, the funded status of the model pension plan examined in each issue of Prism rose by 4 percentage points, to 104 percent, as illustrated in the graph below.

This increase in funded status is primarily attributable to a 10 percent decrease in liabilities, partially offset by a 7 percent decrease in assets.

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High Interest Rates Raise Model Plans Funded Status Q3 2022

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Aspects of investment performance that contributed to the model plan’s loss in asset value

Equity and fixed income returns were again very poor across the board during Q3, as September was the worst month of a very bad year for global investment markets.

U.S. equity markets are now down nearly 25 percent for the year, following another 4 percent loss in Q3. Developed international and emerging market equities also performed very poorly and underperformed U.S. equities as the strong U.S. dollar grew into a headwind for international markets.

Fixed income returns were also poor again this quarter, both domestically and internationally, as interest rates continue their upward trajectory.

Examine your own DB plan’s experience

Plan sponsors should examine changes in their own DB plans’ assets, liabilities and funded ratios from the vantage point of both accounting and funding metrics.

We can help employers project their DB plans’ funded ratios with a complete view of the range of a plan’s possible future statuses, presenting early warning signs of potential challenges.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.