> When rates fall, pensions take huge paper losses because the present value of liabilities moves inversely with interest rates. To hedge this risk, you enter into a swap with a bank to essentially pay current floating interest rates (in return for receiving a fixed rate).
Honest question: why is the devaluation of bonds from a rise in the interest rate considered a risk to a pension fund? It doesn't impact the ability of the pension fund to fulfill its purpose: deliver an income stream to pensioners.
Sure, the market value of the bonds decrease when rates rise, but the bonds still provide exactly the same income stream as they did before.
That's a good question. Many companies want to get to as close to fully funded as possible so that they can offload the pension from their balance sheet and transfer the risk to an insurance company.
Honest question: why is the devaluation of bonds from a rise in the interest rate considered a risk to a pension fund? It doesn't impact the ability of the pension fund to fulfill its purpose: deliver an income stream to pensioners.
Sure, the market value of the bonds decrease when rates rise, but the bonds still provide exactly the same income stream as they did before.