Under current regulations, companies have been afforded temporary relief through an expanded range around the 30-year Treasury rate that defined benefits plans can use to calculate funding status that was provided in an economic stimulus bill enacted in 2002. However, that relief expires at the end of 2003, according to a Reuters report.
>The Bush proposal, which still needs Congressional approval, seeks a new interest rate benchmark to replace the 30-year Treasury bond rate, which has plunged as a result of the discontinuation of the 30-year Treasury bond. To accomplish this, it would temporarily adopt a provision in pension reform legislation put forward by Representatives Benjamin Cardin (D-Maryland) and Rob Portman (R-Ohio) ( See Unfinished Business, Regulatory Relief Top Portman/Cardin Bill ) .
Further, it represents a deviation from earlier proposals by Treasury Undersecretary Peter Fisher, who sought to extend the temporary solution for another two years. However, lawmakers and industry representatives said they wanted a permanent fix faster than that.
>On the accelerated Bush schedule, for the first two years, the contribution rate would be calculated from a blend of rates on high-quality corporate bonds, as proposed by Portman and Cardin. Following that, firms would have to start phasing in calculations that take into account when their pension bills would actually come due, using different points on the corporate bond yield curve. The phase-in would be complete by the fifth year.
>At issue is what interest rate companies should use when deciding how much to sock away for their defined benefit pension plans. The current r ate has sunk to artificial lows in recent years, inflating the amount of cash that companies with defined benefit pension plans must allocate to satisfy funding requirements. The low rate also inflates lump-sum distributions by creating the appearance that more cash is needed to reach a promised benefit at retirement age, although it is unclear whether the updated rate will be the same for both funding and lump sum calculations.
Reaction On Both Sides
>Congressional Republicans commended the administration for bringing forward a proposal. “Because this issue has wide-ranging implications on retirees, employers, workers and the federal government, we have to find a suitable long-term replacement for the 30-year bond rate,” Representative John Boehner (R-Ohio), chairman of the House Education and Workforce Committee, said in a statement.
However, one industry group had a lukewarm reaction. Janice Gregory, vice president of the ERISA Industry Committee, which represents major US companies with 25 million active and retired workers, said Treasury had taken a step in the right direction by moving toward a corporate bond rate. But she added, “They still have a very unrealistic picture of what it means to change to a yield curve.”