June 29, 2012 (PLANSPONSOR.com) – Congress has given final approval to a bill that includes provisions that would give defined benefit plan sponsors some funding relief.
The transportation funding bill expands the period used for determining interest rates for calculating pension liabilities to 25 years (see “Pension Funding Measure Addresses Low Interest Rates”). For 2012 the interest rates must be within 10% of the average of benchmark bond rates for the 25-year-preceding period, according to news reports. The provision helps plan sponsors because interest rates were much higher before the 2008 financial crisis, and the use of higher interest rates lowers pension liability calculations.
Retirement industry groups and providers have urged the legislature to pass the measure (see “Council Says Quit Stalling on Pension Funding Stabilization”). Researchers for the Society of Actuaries (SOA) say the pension funding stabilization provisions in the bill would effectively prescribe a pattern of valuation interest rates for the next several years, with a significant increase in 2012 rates followed by declines in subsequent years. However, they add that the predictability of contribution requirements would show some improvement in the short term but little improvement in the long term, because the funding stabilization provisions do not address non-interest-rate sources of volatility and are less likely to affect valuation rates in the future (see “Pension Funding Stabilization Not a Long-Term Cure”).