Asset/Liability Monitor — Perfect Storms and Ticking Time Bombs

October 1, 2005 — Much has been written about the defined benefit pension plan (DB plan) crisis and how the “perfect storm” of falling interest rates mixed with falling equity asset values caused plans to shift from overfunded to underfunded status within a few years. This simplified explanation implies that higher interest rates (i.e. discount rates) and an improving stock market will naturally fix this problem and the underfunded status to evaporate. Unfortunately, saving DB plans and the threat to employee retirements will be much more difficult than simply raising discount rates or waiting for a cyclical market recovery. Billions of dollars have already been spent by corporations and billions more will inevitably be needed to overcome the growing underfunded pension void created by misguided investment strategies. The damage has been severe with even more danger on the horizon. Makeshift solutions can buy time, but long term structural change will be necessary to return stability to the pension system.