A new federal law is continuing to protect pension plan sponsors from low 30-year Treasury bond rates.[@@]
The composite corporate bond rate that sponsors now must use to compute pension plan liabilities amounted to 6.18% in June, down slightly from the 6.19% rate recorded in May, according to Internal Revenue Service Notice 2004-51.
Pension plan sponsors once had to use the 30-year Treasury bond rate. In June, that rate held steady at 5.17%, Paul Stern and Tony Montanaro, IRS employee plan experts, write in the IRS notice.
The spread between the weighted average for corporate bonds and the weighted average for 30-year Treasurys was 1.15 percentage points, down from 1.17 percentage points the previous month.
Higher interest rates hurt home buyers and other borrowers, but they help pension plan sponsors, who depend on years of interest income to build plan assets. Sponsors have been complaining about falling yields on investments in 30-year Treasurys since the government stopped issuing 30-year bonds 2 years ago.
The new Pension Funding Equity Act, a section of H.R. 3108, 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.
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 July, the corporate bond weighted average is 6.32%, and the permissible range is 5.69% to 6.32%.
The IRS will release the composite corporate bond rate for July in August.
The IRS has posted a copy of Notice 2004-51 at http://www.irs.gov/pub/irs-drop/n-04-51.pdf