With improvement in funded statuses, it is a good time to lock in yields for asset / liability matched pension funds, concludes Citi in its recent report.
Erin Lyons and Swati Verma of Citi point out that when pensions are undertaking asset/liability matching, movement in underlying assets would become irrelevant.
Drop in yields
Focusing on corporate pension plans, Citi analysts point out that pensions manage assets to eventually pay their beneficiaries. For this purpose, corporates discount their liabilities using a market-based rate, such as the Citigroup Pension Liability Index, that usually tracks the AAA-rated corporate index. The following graph highlights how low rates have challenged pension plans:
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