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.