While low interest rates have been a “boon” to corporate borrowers, the low-yield environment is likely to “exacerbate underfunded pension positions” for corporations in the near term, Fitch said in a new report.
In an Aug. 23 report, the international rating agency explained that the combination of low-interest and the deflationary effects it will have on returns and valuations would lead to “enhanced contributions” as an answer to the underfunded problem. Fitch Analysts Mark Oline, John Culver and James Rizzo compiled the U.S. and Canadian special study.
“Simply put, lower yields will likely require higher contributions at a time when certain underfunded programs are already experiencing a schedule of sharply higher required contributions,” Fitch said. “Public sector pension funds face the same challenges of a low yield environment, but the very large funding gaps and lack of funding requirements could present an even more severe scenario.”
Other indications of this underfunded frenzy can be found in separate industry studies as well. For instance, BNY Mellon Asset Management said in its July Pension Summary Report that plans were able to marginally bump up their funding status by 2.9% to 76.9%. However, this figure did not come close to the March posting of 88.1%.
Alternately, on Monday, the Pension Benefit Guaranty Corporation (PBGC) said that it expected its deficit to skyrocket by nearly “five times” to $4 billion within the next decade. Currently, the agency covers nearly 104 multiemployer plans. It expects to pay billions of dollars to such plans that either have already run out of assets or are projected to do so.
With this dim future, Fitch said in the report that there are “no shortcuts” to find a solution.
“Prudent management will likely require contributions well in excess of the minimum required given low yields and low equity returns,” the analysis stated.
Fitch further states in the report that “simply hoping for a rescue from high equity returns or the impact of higher interest rates on the measurement of benefit obligations is not a prudent strategy.”
“…The potential for deterioration on both sides of the equation--lower returns plus a lower discount rate--presents the potential for further onerous jumps in liability measures,” the study exclaimed.