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Treasury Pushes Yield Curve To Calculate Defined Pension Benefits

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Treasury Pushes Yield Curve To Calculate Defined Pension Benefits


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 of the U.S. Treasury Department.

Fisher testified last month at a hearing of the House Subcommittee on Select Revenue Measures. The subcommittee scheduled the hearing in part to review the Treasury Departments 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 that 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.

He added that Salomon Brothers, a unit of what is now Citigroup Inc., New York, developed a pension yield curve in 1994 for the U.S. Securities and Exchange Commission.

“Monthly Salomon Brothers yield curves dating back to January 2002 can be found on the Society of Actuaries Web site,” Fisher said.

The Treasury Department could publish a yield curve of its own that would reflect interest rates for high-quality, zero-coupon, call-adjusted corporate bonds of varying maturities, Fisher said.

Representatives for employers continued to argue that adopting a yield-curve approach would be complicated and might drive up pension plan costs at a time when employers already are shying away from offering defined-benefit plans.

But employer representatives agreed with the Treasury Department on the need to replace the 30-year Treasury yield benchmark. Because the 30-year bonds are popular and the Treasury Department has stopped issuing them, the yield on 30-year Treasury bonds available in the bond resale markets is extremely low, experts say.

When the rate used in pension calculations falls, employers have to contribute more to cover pension liabilities, on the assumption that a low rate means earnings on pension fund assets will be low.

For similar reasons, reducing the discount rate used in calculations increases the amount of cash that pension plans have to shell out when they make lump-sum payments to departing employees.

Links to Fishers remarks and the remarks of other hearing witnesses are posted at

Reproduced from National Underwriter Life & Health/Financial Services Edition, August 11, 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.


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