[lultimouomo]

When rates fall, liabilities increase, but so does the value of the bonds that the fund holds, so if they are properly funded and invest solely in bonds they are perfectly even.

But bonds have had very low yields for decades, which makes funding future pensions solely with them very expensive, so pension funds started investing in stocks- this makes sense, as pension funds are long term investors which can earmark funds as "not to be withdrawn for the next 30 years".

Now THIS creates the paper loss problem: yields fall, liabilities rise, but funds don't have enough bonds raising in value to match that loss. So they use derivatives to hedge the risk.

[djbebs]

No, the values of the bonds falls.

[lultimouomo]

When rates fall the value of outstanding bonds raises.

You can think about it this way:

Yesterday's bonds yield 10%.

Yesterday I bought a 10% yield bond brand new, at a 100 cents on the dollar.

Rates fall, today's bonds yield 1%. If you want to buy a bond, you can buy a new 1% yield one at 100 cents on the dollar, or you can buy my used one, which yields 10%. How is mine not more valuable than 1$?