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Treasury Proposes Fix For Pension Liability Calculations

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NU Online News Service, July 8, 2003, 5:52 p.m. EDT – The U.S. Treasury Department says employers ought to use a yield-curve discount rate when calculating pension liabilities.

The yield-curve rate would be based on “the term structure of a pension plan’s liabilities,” or the dates when a pension plan’s liabilities start and end, according to a Treasury Department proposal that was released Monday.

The department is recommending that plan sponsors phase in use of the yield-curve approach over five years.

Today, plan sponsors are supposed to use a rate based on the rates that the federal government pays on 30-year Treasury bonds.

But the federal government has stopped issuing new 30-year Treasury bonds, and employers, pension experts and unions argue that the 30-year Treasury rates prevailing in the bond resale market are far lower than what employers could earn by investing plan assets in shorter-term government bonds or high-grade corporate bonds.

Replacing the 30-year Treasury benchmark is essential because “too low a rate causes businesses to contribute more than is needed to meet future obligations, overburdening businesses at this early stage of the recovery,” the Treasury Department says in its proposal.

Employer groups complain that continued use of the extremely low 30-year Treasury rates could cost them tens of billions of dollars.

The Treasury Department contends that using a rate based on the timing of a pension plan’s liabilities “is easy and simple” and “can be done using a simple spreadsheet.”

Some pension and actuarial groups have questioned whether the Treasury Department should make employers use a yield-curve approach to computing pension liabilities.

Ron Gebhardtsbauer, a senior pension fellow at the American Academy of Actuaries, Washington, testified in June at a House subcommittee hearing that a regulation requiring use of yield-curve rates instead of absolute rates would make computing liabilities more complicated and more expensive without necessarily doing much to change the results of liability calculations.

“Congress might want to delay the requirement to use a yield curve until it has been thoroughly discussed by all parties,” Gebhardtsbauer testified, according to a written version of his remarks.

A second section of the Treasury Department statement suggests that sponsors of plans with asset shortfalls of at least $50 million ought to have to publish information about the plan underfunding.

A third section proposes that the government should put tight limits on employers with “junk bond credit ratings” and severely underfunded plans. In many cases, shaky employers end up passing their pension benefit promises on to the federal pension insurance system, the Treasury Department notes.

The text of the Treasury Department proposal is posted at