Compliance March 15, 2012

Pension Funding Measure Addresses Low Interest Rates

March 15, 2012 (PLANSPONSOR.com) – The U.S. Senate passed a highway bill that includes a provision for pension relief.
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The measure expands the period used for determining interest rates for calculating pension liabilities to 25 years. 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. 

The American Benefits Council (ABC), upon final passage of The Highway Investment, Job Creation and Economic Growth Act of 2012 (S. 1813), said in a statement that the pension funding provision is based on the Council’s October 2011 proposal (see “ABC Urges Change to Calculation of Pension Liabilities“). In February, President James A. Klein told lawmakers that low interest rates are creating a skewed picture of pension deficits.  

“Pension policy can be exceedingly complicated, but enactment of this funding stabilization provision makes perfect sense. It smooths out a company’s funding obligation so it is less sensitive to abnormally high or low interest rates that distort a plans financial condition either too positively or too negatively,” Klein said in the ABC statement. “This measure saves jobs and raises federal revenue while preserving valuable retirement coverage for millions of American workers. We call on members of the U.S. House of Representatives to join the bipartisan effort by enacting this measure as soon as possible.”

ERIC Weighs In  

The ERISA Industry Committee (ERIC) also issued a statement following the Senate’s passage of the pension relief.  

“While this bill is not perfect, it is an important first step. Plan sponsors and workers need more stable and predictable funding requirements that depend on relief to plan sponsors who are struggling to fund liabilities that increased as a result of the Pension Protection Act (PPA) and the government's low interest rate policy.     

“The current interest-rate environment is severely burdening companies and threatening the viability of defined benefit plans, many of which must choose between funding their plans and hiring and capital investments or even further cutting back on jobs.   

“We encourage the House to follow through and approve this important legislation.” 

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