Hi, Zeke - one of the positives of DB plans is that the impact of markets is not as direct for individual participants as they are in DC plans. DB plans are managed professionally with very long time horizons, with a balance between equities, fixed income and some amount of alternative investments (such as real estate). Ups and downs in the markets don't have a direct impact on beneficiaries, as they do for DC plan participants, who face market risk related to timing of drawdowns from their accounts.
My understanding is that increases in yield on long bonds generally is positive for funded status of plans. You might also want to read the JP Morgan research brief that I linked to in the Morningstar column, which gets into a detailed discussion of how DB pension fund managers have learned how to manage risk better over the last couple decades.
I really liked this piece on defined benefit pensions! I definitely think more pensions would be welcomed by employees. I do wonder if the current interest rates are a temporary tailwind though? No one can predict interest rates, but it’s also hard to promise benefits based on todays rates if they drop again in the future. Please let me know if I’m thinking about that wrong. Thank you!
Hi, Zeke - one of the positives of DB plans is that the impact of markets is not as direct for individual participants as they are in DC plans. DB plans are managed professionally with very long time horizons, with a balance between equities, fixed income and some amount of alternative investments (such as real estate). Ups and downs in the markets don't have a direct impact on beneficiaries, as they do for DC plan participants, who face market risk related to timing of drawdowns from their accounts.
My understanding is that increases in yield on long bonds generally is positive for funded status of plans. You might also want to read the JP Morgan research brief that I linked to in the Morningstar column, which gets into a detailed discussion of how DB pension fund managers have learned how to manage risk better over the last couple decades.
I really liked this piece on defined benefit pensions! I definitely think more pensions would be welcomed by employees. I do wonder if the current interest rates are a temporary tailwind though? No one can predict interest rates, but it’s also hard to promise benefits based on todays rates if they drop again in the future. Please let me know if I’m thinking about that wrong. Thank you!