Under theNational Employee Savings and Trust Equity Guarantee Act (NESTEG),put forth by Grassley and co-sponsored by the committee’s ranking DemocratMax Baucus of Montana, pension plan sponsors would use a single interest rate to be based on corporate bonds, typically higher than a traditional formula based on US Treasuries. However, after three years, a corporate-based, interest rate yield curve would then kick in.
The yield curve would mean using different interest rates to figure the liabilities of workers of different ages under the theory that benefits promised to older workers must be paid sooner than those promised to younger workers and that timing difference should be taken into account when determining a plan’s funded position.
“This proposal provides guidance in the short term that’s familiar to the defined benefit plan community,” Grassley said in a news release. “Over the long term, the proposal phases in an interest rate that will accurately reflect the underlying defined benefit plan’s liability to its employees. The long-term proposal will yield a transparent and meaningful interest rate. This proposal gives employers a fair amount of time to adjust to an eventual yield curve. It’s important to enact this policy. Workers need reliable funding of their pensions, and employers need a reliable basis on which to calculate pension payments.”
The liabilities of a pension fund are computed by adding up its promised future benefits and discounting that sum back to the present using an interest rate as a discount factor. The lower the interest rate, the higher the present value of the liabilities and the more likely a plan will appear underfunded. Current law requires plan operators to base these calculations on the rate of the 30-year Treasury bond. But the long bond has been discontinued.
Congress temporarily eased the funding rules last year, but that expires at the end of December. Companies say that if nothing is done they will be forced to pour cash into their pensions next year.
“Millions of Americans have hundreds of billions of dollars invested in employer-sponsored retirement plans,” Grassley said in the release. “My goal with this legislation is to make sure corporate missteps, including fiduciary mismanagement, aren’t allowed to fester, especially when it comes to protecting workers’ pensions.”
In addition to the pension proposal, the bill includes provisions for:
- new diversification rights for company stock in plans
- new disclosure requirements for transaction suspension periods, or blackouts
- new disclosure through periodic benefit statements and retirement savings information.
A full copy of the Grassley announcement can be found at http://finance.senate.gov/press/Gpress/2003/prg091703a.pdf .