Remember last year at this time? As year-end discount rates for retirement plan accounting purposes dropped below 5%, no one thought they could go much lower. Well, here we are again. Based on information as of November 30, rates for the full high-quality bond universe are down about another 0.5% during 2012. Further, the high-quality bond market has "tightened," meaning the dispersion of rates in that space has diminished. Why? One reason is several bonds that used to be high-quality as defined by the accounting standards grade Aa or better have been downgraded by the rating agencies and are no longer included in the high-quality universe. This tightening could result in an even bigger decrease in the discount rate for a company using a "high end" curve or specific bond matching to set its rate, as those methods typically utilize a subset of bonds with higher yields.

What impact has this had on pension plans? Looking at the latest Milliman Pension Funding Index, the 100 largest corporate defined benefit plans have experienced a decline of $129 billion (or 4.7%) in funded status since December 31, 2011, even after considering asset gains for the year.

On the funding side, for those who opted to use the Moving Ahead for Progress in the 21st Century (MAP-21) rates for 2012, rates vaulted up toward 7%. With reduced minimum funding requirements and the removal of benefit restrictions, plan sponsors were able to adjust their funding strategies. Looking ahead to 2013, the interest rate stabilization corridor widens from a range of 90% to 110% around the 25-year average of high-quality corporate bonds to a range of 85% to 115%. The IRS may not release the 2013 rates until well into the year, but it's looking as if they will be down about 0.6% from 2012. For a typical plan, this could translate to a drop in the range of 8% to 10% in the plan's funded status. It may be time now to start determining what this could mean for plan funding and benefit restrictions over the next 12 to 18 months. Oh, and another significant drop is potentially on the horizon for 2014, when the corridor widens further to a range of 80% to 120%.