NU Online News Service, June 6, 2003, 4:35 p.m. EDT – Congress should “keep it simple” when it fixes the discount rate that U.S. defined-benefit pension sponsors use to compute their liabilities, according to Ron Gebhardtsbauer, a senior pension fellow at the American Academy of Actuaries, Washington.
The U.S. Treasury Department has suggested that pension sponsors really ought to use a “yield curve” instead of a single discount rate. Calculations based on a yield curve would assume different rates for short-term, medium-term and long-term liabilities.
The yield curve proposal “has delayed enactment of a permanent fix,” Gebhardtsbauer testified Wednesday at a hearing of the U.S. House Subcommittee On Employer-Employee Relations, according to a written version of his remarks.
Using yield curves instead of discount rates would make computing liabilities more complicated and more expensive without doing much to change the results of the calculations, Gebhardtsbauer argued.
“Congress might want to delay the requirement to use a yield curve until it has been thoroughly discussed by all parties,” Gebhardtsbauer said.
The discount rate represents the projected rate of return on plan assets. Federal law requires sponsors to base the discount rate on 30-year Treasury rates, but the government has stopped issuing new 30-year bonds. Strong demand for the remaining 30-year bonds has driven 30-year rates down to record lows.
The lower the assumed rate is, the more employers have to contribute to fund defined-benefit pension plans.
Employer groups and labor groups say benchmarks based on the 30-year Treasury rate are obsolete. Rates on high-quality corporate bonds are also down, but the employer and labor groups have told Congress that the country would be better off with a pension discount rate based on corporate bond rates.
“By fixing the discount rate, Congress signals to employers its intention to keep defined benefit plans as a viable option for employer retirement programs,” Gebhardtsbauer said.
But Gebhardtsbauer conceded that the government might have to look at contribution requirements again if returns stay low and the Pension Benefit Guaranty Corp., the agency that backs defined-benefit pension plans, suffers major losses.
Other speakers at the hearing included a representative for the Employee Benefit Research Institute, Washington, who talked about the importance of clarifying the laws governing cash-balance pension plans.
Links to written versions of the participants’ remarks are available at http://edworkforce.house.gov/hearings/108th/eer/pensionsec060403/wl060403.htm