Treasury Proposes Fix For Pension Liability Calculations
The Treasury Department says employers ought to use a yield-curve approach when calculating pension liabilities.
Today, plan sponsors use one simple rate that is 20% higher than the four-year average of yields on 30-year Treasury bonds.
Under a new Treasury Department proposal, sponsors would use a rate based on corporate bond rates.
But, instead of using a simple corporate bond index rate, sponsors would have to use a corporate bond yield curve that would take into account the timing of an employers future pension benefit payments.
The Treasury Department is making the proposal because it, Congress and industry groups agree that the 30-year Treasury benchmark is out of date.
The federal government has stopped issuing new 30-year Treasury bonds, and pension experts say the 30-year Treasury rates now prevailing in the bond resale market are far lower than the rates employers could earn by investing pension plan assets in 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 plans liabilities “is easy and simple” and “can be done using a simple spreadsheet.”
The American Benefits Council, Washington, is one of the major employer groups that questions whether requiring employers to use yield curves in pension liability computations makes sense.
Just the fact that the Treasury Department has put out a proposal for replacing the 30-year Treasury benchmark “will help move the process forward,” John Scott, the councils retirement policy director, says.
But the departments recommendation for replacing the 30-year Treasury rate with yield curves might lead to a big increase in liabilities for older plan members, Scott says.
The Benefits Council also worries about the possibility that the Treasury Department will eliminate current “rate smoothing techniques” and push sponsors to use a new interest rate “spot curve” each year, Scott says.
The spot curve approach could lead to big ups and downs in employers pension liabilities, Scott says.
If the Treasury Department proposal prevails, “I think pension plans are going to be a lot less attractive” to employers, Scott warns.
But Ron Gebhardtsbauer, a senior pension fellow at the American Academy of Actuaries, Washington, argued in June at a House subcommittee hearing the yield-curve approach would make computing pension liabilities more complicated and more expensive without having much effect on the results.
Reproduced from National Underwriter Edition, July 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.