Defined benefit pension plans are the traditional and increasingly rare type of pension plans offered through employers.
In contrast to defined contribution pension plans such as the 401(k), participants in defined benefit (“DB”) plans receive contractually guaranteed income and assume none of the risks (investment risk, interest rate risk, longevity risk, etc) associated with producing that lifetime income stream.
The problem is that defined benefit plans are scarce, and many of those that do still exist are in tough shape.
As reported by Bloomberg today, the “perfect storm” of ultra-low interest rates and low investment returns has resulted in record deficits for DB plans:
"The deficit between the assets of the 100 largest company pensions and projected liabilities widened by a record $124 billion in September to $439 billion, Seattle-based Milliman said today in a statement, based on data going back to 2000."
As discussed in a related post, low interest rates increase the cost of any type of pension plan because the future value of pension plan liabilities is higher when discounted with a lower interest rate.
Poor equity returns only compound the problem.
The Bloomberg article indicates that companies have assumed a 7.75 percent median return on their assets.
For many plans, this return assumption is overly optimistic given recent, current and potentially future capital market conditions.
Source: Bloomberg
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