NU Online News Service, April 13, 2004, 1:33 p.m. EDT – The American Academy of Actuaries, Washington, is welcoming enactment of the new pension rate law.[@@]
For 2 years, the law will help employers that sponsor defined benefit pension plans by changing a factor in the minimum plan contribution formula. The law will cut employers’ plan funding costs by replacing the 30-year Treasury bond rate with a higher benchmark rate based on a long-term corporate bond rate index.
The House and the Senate rushed to pass a conference report on H.R. 3108, the Pension Stability Act, earlier this month, and President Bush rushed to sign the bill Saturday so that employers can apply the rate change to their first-quarter pension contributions, which are due April 15.
The passage of H.R. 3108 “is an important first step by Congress and the administration in setting the stage for changes to ensure that the United States continues to encourage employees’ and employers’ support for the financial security and stability provided through defined benefit plans,” Kenneth Kent, vice president of the actuarial academy’s Pension Practice Council, says in a statement. “Both employees and employers needed this legislative correction to stabilize the funding of their pension plans.”
H.R. 3108 may be a temporary fix, but it “will provide time for Congress and the administration to develop a long-term solution to secure a place for our voluntary employer sponsored retirement system,” the actuarial academy says.
Interest rates are much lower now than they were between 1970 and 2000. Because 30-year bonds are popular and the federal government stopped issuing them 2 years ago, yields on 30-year bonds are even lower than rates on other types of notes and bonds.
When the official pension contribution benchmark rate falls, employers must contribute more to their pension plans to meet federal plan funding requirements.
Some pension funding experts argued that shifting to a corporate bond index would increase the likelihood that employers will shortchange their plans, but employer groups said sticking to an artificially low rate would force many employers to drop their defined benefit pension plans.