Rate Relief on Tap for DB Plans?

March 14, 2003 (PLANSPONSOR.com) - Plan sponsors hoping for some defined benefit relief might have some reason for hope.

Broad-ranging pension legislation, including a replacement for the 30-year Treasury bond interest rate as a benchmark for defined benefit plan funding calculations, could be introduced as early as next week, according to Washington-based publisher BNA, citing comments from Representative Rob Portman (R-Ohio).

Portman is collaborating with his pension reform teammate Representative Ben Cardin (D-Maryland) on the bill.   The pair are well known, and well-regarded, in the pension community for their efforts with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Rate State

While declining pension asset values have been widely pilloried in the media as a significant contributor to the current pension shortfalls, today’s record-low interest rates have a much greater impact.   Pension obligations are the amount an employer would need to invest today, based on a rate that discounts the present value of future liabilities.   Rates on the 30-year bonds traditionally used for such long-term projections plunged after the US Treasury Department stopped issuing them. As a result, liabilities are artificially inflated and employers have been required to pay millions of dollars in unnecessary contributions to their pension plans, according to industry experts.

Recognizing the problem, Congress enacted temporary relief as part of the 2002 economic stimulus bill, broadening the permissible range around the rate that companies can use to make the calculations (see  PBGC Releases Long Bond Yield Guidance ).   However, that relief expires at the end of this year.

According to the BNA report, Portman has been in discussions on the matter with the Bush administration, which has assembled a task force to recommend a replacement rate and possible restructuring of funding rules. The work of that task force was alluded to earlier this week by Steven Kandarian, executive director of the Pension Benefit Guaranty Corporation (PBGC) in testimony before the Senate Finance Committee (see  Senators Urged To Consider DB System Overhaul ).   At the time Kandarian cautioned, however, that any such change should not be pursued simply to reduce the apparent amount of pension liabilities.

New Proposal

The new proposal, which reportedly includes additional pension simplifications, as well as an acceleration of contribution limit increases, also picks up on some of the ideas put forth by the Bush administration in proposals released January 31 (see  ERSAs Bear Major Changes for Plan Sponsors ).   Elements of that proposal drew criticism from a number of retirement services industry groups who were concerned about its potential impact on the creation of small employer savings programs (see  Industry Groups Fret About Impact of Bush Proposal ).

Last year Portman and Cardin introduced the Protecting America’s Savings Act, which provided relief from the current required minimum distribution laws, as well as accelerating contribution limit increases (see  Portman-Cardin Unveil Second Pension Reform Bill ).