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De-risking in 2023, Part 1

In this article we provide analysis of a specific de-risking issue for 2023: how higher 2022 interest rates may affect sponsor decisions to de-risk (or not de-risk) defined benefit plan liabilities via a lump sum window in 2023. In a follow on article we will consider how the decision to settle lump sums in 2023 affects ongoing plan finance (balance sheet, income statement, overhead, and cash flow).

Interest Rates

Between 1984 and 2022, long-term interest rates declined from all-time highs (above 13%) to all-time lows (below 3%). This has been a persistent headwind for anyone involved in managing pensions for more than 35 years.

2022 marked a decisive break in this pattern. The chart below shows the behavior of long-term rates between the end of 2012 and the end of  2022:

Rates increased by more than 2% during 2022, an event not seen since 1980.

Interest Rates and Lump Sums

One impact of higher interest rates is to reduce the value of pension liabilities, including the cost of lump sums.

This plays out differently for different pension sponsors. Plans that include an ongoing lump sum provision (or other accelerated form of payment) must specify a “lookback month” (used to determine the lump sum valuation interest rate) and a “stability period” (to determine the period over which that rate will apply) in their plan documents.

At one extreme, a “1-month lookback” and “1-month stability period” means lump sum rates change monthly, based on the most recent rates available. For plans using this method, lump sums declined during 2022 as rates rose (similar to annuity purchases, which are always marked to market). And lump sums in 2023 will increase/decline as 2023 interest rates (month by month) decline/increase.

At the other extreme, a (calendar year) plan using a “5-month lookback” and “1-year stability period” used August 2021 rates to calculate lump sums for all of 2022 and will use August 2022 rates to calculate lump sums for all of 2023. These plans will see a sharp drop in lump sum values between December 2022 and January 2023.

For purposes of 2023 lump sum windows, sponsors should understand what constraints, if any, apply to the choice of “lookback month and stability period” in connection with the window.

Higher Rates, Lower Lump Sums

The table below summarizes the five sets of PPA segment rates available for calendar year plans (August, September, October, November, and December) for 2022 and 2023 for  calendar year plans with a “1-year stability period,” and the “delta” (increase in rates for 2022 vs. 2021 lookback months) for each lookback month. (Note, “1st segment” rates are generally not significant for most lump sum calculations.)

The table below translates these rates into lump sum values for a 50 year old participant with a life annuity benefit of $100 per month payable beginning at age 65:

For calendar year plans with a 1-year stability period, 2023 lump sums for this participant are 33%-47% lower than 2022 lump sums. That is an unprecedented decline in the cost of paying lump sums.

For plans contemplating a 2023 lump sum window that have latitude with respect to lookback month and stability period, it’s worth noting that interest rate volatility during late 2022 means different lookback months produce very different 2023 lump sum values (the October lookback month produces a lump sum 22% lower than the August lookback month).

Looking Ahead

Higher interest rates mean lower pension liabilities. The foregoing sketches out how higher rates will be expressed for plan sponsors that pay lump sums and considerations for sponsors contemplating a lump sum window in 2023.

In the next article, we will look at the impact of 2023 settlements on plan funded status, funding requirements, income statement, balance sheet, and future overhead costs.

This is a publication of O3 Plan Advisory Services. If you have any comments, or have questions about regulatory developments, please contact your relationship manager or Mike Barry at    The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise.   Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.