Industry News

In May 2021, the Society of Actuaries (SOA) released its report, Understanding the Impact of the Low Interest Rate Environment on Retirement Security in the U.S. The report examines academic and practitioner research related to the impact on retirement security of the low interest rate environment in the U.S.

According to the report, “Persistent low interest rates could affect the retirement security of Americans greatly through direct impacts on investment returns and through impacts on the capacities of governments and the private sector to finance Social Security, pension funds, and other retirement savings mechanisms.” 

Regarding U.S. public defined benefit plans, the report indicates that the direct impact of low interest rates has resulted in plans slightly lowering their discount rates primarily due to their unique regulatory environment. Also, it cautions that low returns may cause challenges in meeting existing pension obligations.

Further, indirect consequences have increased the allocation to equity-like asset classes which may lead to greater investment risk. In addition, higher contributions will be required if lower than expected returns cause underfunding. Also, some plans may choose to cut benefits for new members, share risk with plan members or possibly consider introducing hybrid plans that offer a combination of defined benefit (DB) and defined contribution (DC) plan features.

In the short to medium term, the implications for retirement security are expected to be limited since public DB plans are backed by tax revenue and benefits are typically statutorily protected. While over the long term, the report indicates that pension reforms may generally be less generous for future employees and plan participants may bear more risk.

The report is available here.