Duration matching offers hedge against pension volatility

Article Abstract:

Duration matching is an option for pension managers to balance return assumptions against liabilities. Stock-market volatility is diffused by a portfolio of bonds with a duration (time to maturity) and interest rate sensitivity that match the pension obligations. These bonds can balance changes in pension obligations caused by changes in interest rates. The new rules of the Finance Accounting Standards Board (FASB) limit the control of volatility in liabilities and require the annual setting of pension fund return rates. Companies with overfunded defined benefit plans can purchase annuities worth up to 50 percent of the plan's liabilities instead of terminating the plan. These annuities are an asset on the balance sheet.

Pension, health, and welfare funds, Pension funds

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New round of changes adds headaches for defined benefit plans

Article Abstract:

New laws are making company-sponsored pension plans more expensive to maintain and more difficult to administer. Proposals by the Financial Accounting Standards Board and provisions of the 1987 Omnibus Budget Reconciliation Act (OBRA) mean that corporate pension managers are facing radical changes to 'defined benefit plans', pension plans that promise specific retirement benefits. The Pension Benefit Guaranty Corp which insures pension plans is raising its premiums. Additionally, OBRA eliminates certain tax deductions for plans which exceed 150% funding of current liabilities. These additional rules, expenses, and possible penalties make some company fringe benefit packages more and more unattractive to maintain.

Compensation and benefits, Pensions, Employee benefits, United States. Pension Benefit Guaranty Corp.

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Hybrid financing instrument improves cash flow planning

Article Abstract:

Because they place ceilings and floors on future fluctuations in the interest rate, floating rate bonds allow corporate issuers to minimize risk and more accurately plan cash flow (since payments to investors are not subject to as much future variability). A floating rate corporate bond innovated by Baltimore Gas and Electric with the help of Paine Webber is discussed; Baltimore Gas has so far issued $200 million of such debt instruments. As interest rates continue to fall, the floating rate bonds also become more attractive to investors, since floors placed on the bonds have, in the past, created better performance from the floating rate issues than the going rate of interest.

Analysis, Innovations, Economic aspects, Securities, Interest rates, Bonds, Bonds (Securities), Corporations, Corporate finance, Floating rate notes, Negotiable instruments

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