Issues: Single Employer Funding Issues: Questions and Answers on the Re-issuance of the 30-year Treasury Bond

Does re-issuance of the 30-year Treasury bond solve the funding problem?
No, the 30-year Treasury bond rate is an inappropriate benchmark for pension liabilities because it does not accurately reflect the investment experience of the plan or the annuity rate charged to terminating plans. A composite corporate bond rate is a realistic interest rate assumption that appropriately reflects both the long-term rates actually earned by pension plans and the annuity rates charged to terminating pension plans. It should be used for both contribution and pay-out purposes.

Plan sponsors have been working with Congress and the Administration to enact a permanent solution to this issue in order to properly analyze future plan expenses for over four years.  During this time the four-year weighted average of the long-term corporate bond rate has been temporarily used for funding calculations but not for pay-out purposes.  An extension of the temporary fix using a composite of conservative long-term corporate bonds does not address the calculation of lump sum benefits.  We strongly support continued efforts to achieve a permanent workable resolution to funding reform.

Is it okay if Congress enacts another temporary provision?
No, plan sponsors must have a permanent solution to this issue in order to properly analyze future expenses. Also, plan sponsors must have consistency in the assumptions used to determine pension liabilities. Temporary fixes and continued extensions do not achieve either of these goals.

In addition, the temporary fix does not address the calculation of lump sum benefits. The interest rate used to calculate the present value of a lump-sum benefit must relate to the interest rate used to determine pension liabilities. Both the calculations of the lump-sum benefit and pension liabilities depend upon the normal retirement benefit. Consequently, it is inconsistent and irrational to disassociate the two interest rates.