New DB Benchmark Rate Coming Soon

US Treasury Department Benefits Tax Counsel Bill Sweetnam told attendees at an American Bar Association meeting a Treasury task force given the responsibility of recommending a replacement benchmark is nearing a decision, Washington-based legal publisher BNA reported.

Temporary relief through an expanded range around the 30-year Treasury rate that defined benefits plans can use to calculate funding status was provided in an economic stimulus bill enacted in 2002.  That relief expires at the end of 2003.

Steven Kandarian, executive director of the Pension Benefit Guaranty Corporation (PBGC), that insures defined benefit plans, said during the Bar Association meeting that any replacement rate should measure plan liabilities as accurately as possible in light of current market rates.

“I think if any relief is necessary or desirable, that certainly can be done,” Kandarian said, according to the BNA. “But the measurement has to be the right measurement.”

The rate 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.