By Erica Harper, Harper Danesh, LLC.
t seems so long ago, but it was just March of 2000.
Technology stocks were peaking, valuations were
stretched and investors started to sell, bursting the
dotcom bubble. With interest rates plummeting as well,
defined benefit (DB) plan sponsors watched their funded
status flip from surplus to deficit almost overnight. Over
the course of the next eight years, the market recovered,
again reaching all-time highs, interest rates stabilized and
plan sponsors were once again blissfully ignorant about
the future. Investment returns masked the requirement for
contributions and plan sponsors were back on the holiday
they enjoyed before the crash of 2000. Then Lehman
Brothers became front page news, causing another plunge
in pension plans’ funded status. Now, just four years later,
the market is back. Here we go again…
10 | SUMMER 2013
As the saying goes, “Fool me once, shame on you; fool me
twice, shame on me.” But a third time? Yet it is impossible
not to get caught up in the run up, but is it worth the risk?
As the market continues to go gangbusters, many pension
plan sponsors are scratching their heads. If the market
is going up, why is my funded status going down? The
answer lies in the liabilities.
Pension plan liabilities are typically measured based on
high-quality corporate bond yields. Similar to bond prices,
pension liabilities move in the opposite direction of interest
rates and, as we’ve seen over the last few years, are highly
sensitive to movements in these rates. Unfortunately, this
interest rate risk is out of your control. But what about your