Low-interest rates continue to pummel DB plans

The not-so-welcome trend of low interest rates continuing to liquidate the funded status of the nation’s defined-benefit plans seems unlikely to end, according to experts with Vanguard.

The first big drop in funded status took place a year ago when corporate bond interest rates began to head south, and have continued to stay at historically low levels.

Now, downgrades in some corporate bond issues — whose higher rates had been used in the past by plan sponsors to fix discount rates and better estimate liabilities and funded status — are continuing to plummet.

“For financial reporting, accounting rules require the use of an AA corporate bond yield curve to value pension liabilities,” explained Jeff Sparling, an investment consultant in Vanguard’s Insititutional Advisory Services, in a recent commentary from the company.

“The SEC provides guidelines on picking a discount rate but allows plan sponsors some flexibility in selecting a discount rate among these bonds,” he said. “So when it came time for the annual accounting for plan liabilities at the end of 2011, some sponsors chose bonds along the yield curve that justified a discount rate of around 5 percent — the rate for the highest-yielding AA-rated issues.”