The new 30-year Treasury bonds may play a bigger role in life insurance company investment portfolios than in defined benefit pension plan calculations.[@@]
The U.S. Treasury Department today announced a decision to bring back the 30-year bonds in 2006.
Treasury began issuing the so-called “long bonds” in 1977, and it stopped in October 2001, when the government seemed to be ready to enter an era of big budget surpluses. Since then, a sluggish economy, national security problems and changes in tax laws have led to a series of budget deficits.
Treasury has decided to revive the 30-year bond based on “our commitment to prudent debt management and our desire to maintain cost-effective and diversified portfolios,” Treasury Secretary John Snow says in a statement about the move.
Treasury now hopes to issue between $20 billion to $30 billion in 30-year bonds per year, according to Timothy Bitsberger, the department’s assistant secretary for financial markets. Treasury hopes to auction off the new 30-year bonds twice a year.
Many of the buyers are likely to be insurers.
“Insurers were large purchasers of these instruments before they were eliminated a couple of years ago,” says Jack Dolan of the American Council of Life Insurers, Washington. “We anticipate that they will be large purchasers now that they are available again.”
Access to a fresh supply of 30-year bonds will give insurers a good tool for matching assets and liabilities, says Kevin Ahearn, a director at Standard & Poor’s, New York.
“It will just provide more funding alternatives to issuers, specifically if they have longer-dated liabilities, like a structured settlement,” Ahearn says.
Other buyers of 30-year bonds could include life insurers trying to back policies with 30-year level-premium terms or disability insurers trying to fund benefits for long-term disability claimants with life expectancies of 30 years or more.
In theory, the return of the 30-year bond also could be bringing joy to sponsors of defined benefit pension plans.
Pension fund managers and actuaries once used the 30-year Treasury rate as a benchmark rate when calculating solvency levels and contribution requirements. Managers also used the rate when calculating the size of the lump-sum payments that would be given to workers who were cashing out of the plans.
Since the death of the 30-year bond in 2001, fund managers have had to use artificially created benchmark rates. Most pension fund managers have favored using a 4-year weighted corporate bond index rate.
The Treasury decision to bring back the 30-year bond was expected, but pension fund managers probably will prefer to use the shorter-term corporate bond rate, says Lynn Dudley, a vice president at the American Benefits Council, Washington.
Bills now before Congress, H.R. 2830 and S. 219, would make a 3-year weighted corporate bond index rate the permanent benchmark interest rate in pension fund calculations.
The House Committee on Education and the Work Force has approved H.R. 2830 and sent it to the House Ways and Means Committee.
The Senate Finance Committee approved S. 219, which is somewhat different from H.R. 2830, July 26.
The American Benefits Council supports the 3-year weighted bond rate as the preferred index, but Treasury’s decision to revive 30-year bonds is likely to reinforce concerns that action on benchmark legislation will be delayed until 2006, Dudley says.
One of the reasons action might be delayed is that the rules spelled out in the new benchmark bills would be far more restrictive than the current rules.
The legislation establishing the current temporary index system sunsets at the end of the year. Unless Congress acts before the current system sunsets, the benchmark rate will default to the 30-year Treasury bond rate starting Jan. 1, 2006.
“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,” says Rep. John Boehner, R-Ohio, chairman of the Education and Workforce Committee.