US - The funding pressures felt by US plan sponsors as a result of low interest rates will likely continue until at least late 2011 on the back of the next round of quantitative easing, Mercer said.
The US Federal Reserve has committed to buying $600bn of treasuries over the next nine months. This next round of quantitative easing, or QE2, is likely to hamper the funding levels of defined benefit plans in the short term because it will depress interest rates.
US pension funds use high-quality corporate bonds to discount their liabilities.
"Although pension plan liabilities are valued using yields on high-quality corporate bonds, and not Treasuries, if the spreads between corporates and Treasuries do not change as a result of the purchases, pension discount rates are expected to stay at all time lows for the short term," Mercer said.
However, in the long-term, quantitative easing could spur inflation, driving interest rates higher, and eventually lowering liabilities, a move Mercer does not expect to happen before late 2011 or early 2012.
"The short run effect is a greater demand for Treasuries, which will pressure short and intermediate rates to remain low. The longer term impact of QE2 is to risk higher actual inflation than the market is currently pricing." said Louis Finney, Chief Economist at Mercer.
Meanwhile, if the next round of quantitative easing succeeds in stimulating growth, this could lead to an equity rally that will boost returns for plan assets.
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