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Asset Owner Market Report - Rising Interest Rates and Pension Plans - July 2013

Pension plans have been considering what would happen when interest rates started to rise, and in the past quarter we saw a noticeable increase in rates across developed economies.  While it is unclear if, when, and by how much rates will rise in the future, this recent quarter has shown the impact of this particular increase in rates, and the different ways in which plans were affected.  In this Market Report, we reviewed how asset allocation, the relative duration of liabilities and fixed-income assets, and the co-movement of asset classes influenced the funding ratios of model pension plans.  Understanding a plan’s exposures to interest-rate movements, in the context of managing its surplus, will allow asset owners to make informed trade-offs between hedging risks to their liabilities and seeking opportunities for return.