Compliance September 15, 2003

Grassley To Unveil Age-Based Pension Yield Curve

September 15, 2003 (PLANSPONSOR.com) - A US Senate Republican plans to introduce a bill that would require defined benefit pension plans to base their funding on a yield curve that would feature interest rates that would vary according to a worker's age.

Reported by

Fred Schneyer

>According to the proposal by US Senate Finance Committee Chairman Charles Grassley (R-Iowa), pension plan sponsors would use a single interest rate to be based on corporate bonds – typically higher than a traditional forumla based on US Treasuries, according to a Washington Post report.

>However, the corporate-based, interest rate yield curve would be kick in after three years under the Grassley plan. 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.

>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.

>The Grassley proposal is strongly opposed by companies that sponsor pension plans, though they agree that present law needs to be revised. Janice Gregory of the ERISA Industry Committee told the Post that Grassley’s idea was “undeveloped, untested and unknown.”

“It’s not something that will calm troubled waters,” she said. “You can’t simply take out the 30-year [bond] and plunk in a yield curve. The [funding] rules are all integrated with each other. When you change something as critical as the discount rate you have to change everything else. So when I say people are going to be thrown into a bit of chaos here, that’s what I’m talking about.”