| This paper examines the impact of changing interest rates on employer sponsored defined benefit plans. A number of key economic rates fell sharply since 2007 and are currently at a steady low level. How will the inevitable rise in rates impact pension plan benefits for retiring employees in the near future? Three major types of pension plans are "Final Average Pay", "Cash Balance", and "Pension Equity" (also known as "Stable Value"). Each of these plans has a different payment scheme. Relatively small changes in interest rates from one year to the next can have dramatic consequences on plan benefits, the impact can be on lump sum payouts and/or life annuity benefits. An employee who retires and takes their money at various ages and under different interest rate conditions for these three types of pension plans will be compared. |
Updated 03/19/2014