House Approves Temporary Pension Benchmark Fix
The U.S. House of Representatives voted 397-2 last Thursday to approve H.R. 3108, a bill that seeks to save sponsors of defined benefit plans billions of dollars by replacing the old benchmark interest rate used in pension calculations with a temporary benchmark based on a blend of corporate bond index rates.
The Senate is still debating H.R. 1776, a bill that would provide a permanent replacement for the old pension benchmark rate, the 30-year Treasury bond rate.
James Klein, president of the American Benefits Council, Washington, put out a statement welcoming House passage of the temporary replacement bill and calling for Congress to come up with a permanent benchmark replacement based on a corporate bond rate blend.
“The council has consistently recommended the use of a corporate bond rate blend as the ideal solution,” Klein says in the statement.
But, in the short run, Klein says, “H.R. 3108 requires no further changes to the defined benefit regulatory system and provides a highly accurate and transparent method of funding these plans for the next two or three years.”
The United States began using the 30-year Treasury bond rate as a benchmark back when big budget deficits forced the government to issue large quantities of 30-year bonds every year.
Because the U.S. stopped issuing new 30-year Treasurys in 2001, the remaining 30-year bonds are popular and 30-year Treasury rates are now extremely low.
Employers and pension industry groups are pushing Congress to replace the 30-year Treasury bond rate as a pension benchmark as quickly as possible, because the low benchmark rate assumptions force employers to make bigger contributions.
Bush administration officials have pushed for employers to replace the old benchmark with a “yield curve” approach that would use different interest rates for pension benefits scheduled to be paid at different dates in the future.
Employers and pension groups argue that the yield curve approach would be too complicated, but administration officials say that the approach should be relatively simple for employers equipped with computers, and that using a yield curve approach would be more accurate than using a single blended interest rate.
Reproduced from National Underwriter Life & Health/Financial Services Edition, October 10, 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.