NU Online News Service, July 17, 2003, 5:08 p.m. EST – Using a yield curve to calculate defined-benefit pension plans liabilities is the best way to ensure that the plans can meet their promises to plan participants, according to Peter Fisher, the under secretary for domestic finance at the U.S. Treasury Department.
Fisher testified Tuesday at a hearing of the House Subcommittee on Select Revenue Measures. The subcommittee scheduled the hearing in part to review the Treasury Department’s controversial proposal to replace the 30-year Treasury yield, which is the old interest rate benchmark used for pension plan liability calculations, with a yield curve.
The yield curve would be made up of a bundle of interest rates on corporate bonds, with durations picked to match the dates when pension plans would be paying pension benefits.
The Treasury Department wants to phase in use of the yield-curve approach over five years.
“Proper matching of interest rates to payment schedules cannot be accomplished using any single discount rate,” Fisher told members of the Select Revenue subcommittee, according to a written version of his remarks.
If employers try to cut plan contributions and save money today by using a discount rate that is too high, “this will lead to plan underfunding that could undermine retiree pension security, especially for workers who are nearing retirement age,” Fisher warned.
Fisher scoffed at complaints by employer groups and financial services group that using yield curves, rather than a single benchmark interest rate, would be too complicated.
“Once expected pension cash flows are calculated by the actuary, it is no more difficult to discount benefit payments on a spreadsheet with an array of different interest rates than it is if only one discount rate is used,” Fisher argued.