Treasury Paydown Pressures Pension Plans
The 30-year Treasury bond rate, used to determine pension plan funding levels, is creating a problem for plan sponsors – and employee benefits groups are pushing Washington for a solution.
The American Benefits Council (ABC), for instance, wants a provision included in President Bush’s economic stimulus package that would allow defined benefit pension plan sponsors to temporarily substitute a more accurate benchmark for the current one.
By law, plans are required to assume that that the return on current assets – used to fund future plan liabilities – will equal the return on the 30-year Treasury bond. That return has consistently been about 2% lower than other long-term bonds.
Because return of the 30-year Treasury bond interest rate is so low, currently at 5.35%, the unfunded liability, calculated on the basis of this rate, is artificially high. Pension funds are required by law to supplement this liability with additional cash – cash which is in short supply at this stage in the business cycle. “Debt reduction has depressed the rate of the 30-year Treasury bond, funding calculations using this rate have made defined benefit plans seem more under-funded than they actually are,” John Scott, Director of Retirement Policy at the ABC told PLANSPONSOR.com .The problem has burdened pension plans for some time. And plan sponsors cite overvalued lump-sum distributions and increasing Pension Benefit Guaranty Corporation premiums as additional problems brought on by the requirement.
The ABC believes that temporary relief from excessive funding obligations would allow firms to use their cash to fortify their balance sheet amid the current economic downturn, buying some time before a solution can be found.
The ABC’s current proposal would allow defined benefit plans the option of using a specified alternative benchmark for a period of two to three years. “At present we’re trying to find an acceptable substitute to the rate, Moody’s Aa long-term corporate bond yield average has been suggested as an alternative,” Scott tells PLANSPONSOR.com.Since it remains unclear whether the Treasury has the authority to provide relief, Scott believes that the change would more likely be made through legislation, “or through creating legislation that gives the Treasury the authority to make the necessary changes.”
“We have many supporters and a great deal of interest on both sides of the aisle in both the House and the Senate,” Scott said.“We are examining the possibility of having the change made as a provision in the economic stimulus package, but nothing is certain, and the events of September 11 have made determining a timeline more difficult,” he adds.“We’re fairly confident that we will be able to get some sort of legislative relief. Although the issue is quite a technical one, once people understand it correctly, we’re confident that the will see it as a fair fix,” Scott concludes
– Camilla Klein email@example.com
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