NU Online News Service, June 11, 2004, 4:02 p.m. EDT – The bond markets are starting to give employers that sponsor defined benefit pension plans a little relief.[@@]

The composite corporate bond rate that U.S. employers must use to compute pension plan contributions increased to 6.19% for May contributions, from 5.86% for April contributions, according to Internal Revenue Service Notice 2004-42.

Higher interest rates hurt home buyers and other borrowers, but they help pension plan sponsors, who depend on years of interest income to add to their plan assets. The increase in the composite corporate bond rate should reduce pension plan sponsors’ May contribution requirements, experts say.

Sponsors once had to use the 30-year Treasury bond rate, which has fallen sharply since the government stopped issuing 30-year bonds 2 years ago. In May, the interest rate on 30-year Treasury bonds was 5.42%, the IRS says.

President Bush responded to employers’ complaints about the 30-year Treasury rate in April by signing H.R. 3108 and giving birth to the new Pension Funding Equity Act. One section of the act lowers pension funding costs by temporarily replacing the 30-year Treasury rate with a composite corporate bond rate based on rates for high-quality corporate bonds.

The IRS is using an average of figures from 3 high-grade bond indices to come up with the monthly composite corporate bond rate, Paul Stern and Tony Montanaro, IRS employee plans experts, write in the IRS notice.

The indices are the Citigroup High Grade Credit Index, which covers bonds with durations of at least 10 years that have ratings of AA or higher; the Merrill Lynch U.S. Corporates AA-AAA Rated 10+ Years index; and the Lehman Brothers U.S. A Long Credit index.

The monthly composite corporate bond rate affects employer pension contributions by affecting a 4-year weighted moving average of the composite corporate bond rate. When calculating pension contribution obligations, employers can use any rate between 90% and 100% of the corporate weighted average interest rate, according to Stern and Montanaro.

For June, the corporate bond weighted average is 6.34%, and the permissible range is 5.70% to 6.34%.

The IRS will release the composite corporate bond rate for June in July.

The IRS has posted a copy of Notice 2004-42 at http://www.irs.gov/pub/irs-drop/n-04-42.pdf