GAO Urges Flexibility In Pension Interest Rates

That was the bottom line of a recent General Accounting Office (GAO) study of the pension interest rate issue. GAO was advising Congress on what to do since the US government no longer sells 30-year bonds and, in cutting off sales, has eliminated the previous legal reference point for pension calculations.

The reference-point interest rate plays a central role in pension planning because it helps determine how much money should be set aside now to make benefit payments in the future. Any replacement for the bond will likely carry a higher interest rate, a change that will be welcomed by the pension industry,

GAO researchers said actuaries and other pension experts had suggested a number of replacements for the 30-year Treasury including:

• the composite rates for long-term Treasury securities
• long-term high quality corporate bond indices
• 30-year rates on securities issued by government-sponsored agencies such as Fannie Mae

The other approach, according to the GAO, would be to let regulators at the US Departments of Labor and Treasury and the Pension Benefit Guaranty Corp. jointly adjust the rate “within certain boundaries.”

“The suitability of any interest rate used is likely to change over time and, unless some entity is given the responsibility for monitoring its relationship to group annuity purchase rates, the Congress and pension plan regulatory agencies will have difficulty determining when changes are needed,” GAO wrote.

Peter Fisher, the Treasury Department’s top domestic finance official, praised the GAO for considering a more flexible reference point for pension fund planning. “As you know, some propose replacing the 30-year Treasury interest rate with a pension discount rate that is a composite of long-term corporate interest indices,” Fisher said in a letter, according to Dow Jones. “We are concerned that this approach, or any other single interest rate, ignores the time structure of benefit payments that make up pension liabilities.” GAO said there might be a way to match discount rates to the time structure of pension liabilities. Fisher welcomed this suggestion, saying it was close to the administration’s own research in this area.

“The administration currently is evaluating different methods of computing pension liabilities that could reflect the underlying structure of pension plan liabilities,” Fisher said in his letter. “Our research indicates that the concept is consistent with the best and prudent pricing and design practices of financial intermediaries, including the issuers of annuity products.”