30-Year Treasury Bond Is Back

Lynn Dudley, vice president, retirement policy at the ABC, said the Treasury decision was not unexpected, but is unlikely to diminish interest in the alternative, shorter-term corporate bond rate. A three-year weighted corporate bond rate would be established as the permanent interest rate employers would have to use to measure and fund their pension obligations under legislation that has passed the Senate Finance Committee and the House Education and the Workforce Committee.

The ABC supports the three-year weighted bond rate as the preferred index, but Dudley said the Treasury’s decision to again issue 30-year bonds is likely to reinforce concerns that action on such legislation will be delayed until next year.

One of the reasons for a possible delay is that the bills would be far more restrictive than the current laws governing maintenance of defined benefit plans. The legislation establishing the temporary index sunsets at the end of the year, and the rate would default to the artificial 30-year Treasury bond rate as of Jan. 1, 2006.

The House bill, as passed by the House Committee on Education and the Workforce, is the Pension Protection Act, H.R. 2830; it is now awaiting action in the House Ways and Means Committee. A somewhat different bill, the National Employee Savings and Trust Equity Guarantee Act of 2005, S. 219, was reported out of the Senate Finance Committee on July 26.

Reflecting concerns on the timing of the Treasury announcement, Rep. John Boehner, R-Ohio, chairman of the Education and the Workforce Committee said, “The return of the 30-year Treasury bond underscores the need to complete action on pension reform this year and to establish a permanent interest rate so employers can more accurately measure and fund their pension obligations.

“Without action on comprehensive reform this year, the interest rate will revert back to the 30-year Treasury rate, and there’s no indication of whether this rate would be an accurate measure of pension liabilities,” Boehner said. “The status quo on pension reform is unacceptable, and Congress needs to complete action on comprehensive pension reforms this year.”

Boehner said, “The simple interest rate approach we have proposed in the Pension Protection Act strengthens funding requirements to ensure that employers adequately fund worker pension plans while ensuring employers can better predict and budget for their pension costs on an annual basis.” Reps. Boehner and Sam Johnson, R-Texas, have said they oppose an extension of the temporary corporate bond interest rate that expires at the end of December, saying Congress should complete action on pension reform this year.

For insurers, the Treasury decision is seen as a positive. Kevin Ahearn, a director in Standard & Poor’s financial services rating group, said it would be helpful because it provides issuers with a better way to match assets and liabilities. “It will just provide more funding alternatives to issuers, specifically if they have longer-dated liabilities, like a structured settlement,” Ahearn said.

Jack Dolan, a spokesman for the American Council of Life Insurers, said, “Insurers were large purchasers of these instruments before they were eliminated a couple of years ago. We anticipate they will be large purchasers now that they are available again.”

Rep. John Boehner, R-Ohio, chairman of the Education and the Workforce Committee said, “The return of 30-year Treasury bond underscores the need to complete action on pension reform this year and to establish a permanent interest rate so employers can more accurately measure and fund their pension obligations.”