Joint Hearings Commence For Pension Interest Rate Discussion

“Thirty-year Treasury interest rates and pension funding calculations are all obscure and arcane topics to working families, but our goal here couldn’t be more simple:  To strengthen the retirement security of American workers by protecting the retirement savings that workers expect from their defined benefit pension plans,” Chairman of the House Education & the Workforce Committee, Representative John Boehner (R-Ohio) said at the onset of the joint hearing of the House Education and Workforce Subcommittee on Employer-Employee Relations and the House Ways and Means Subcommittee on Select Revenue Measures.

Overall, sentiment among the majority of opinions offered up to the joint committee was joy in seeing the administration taking positive steps to modify the convoluted current system.  Nonetheless, more steps need to be taken before plan sponsors can evaluate the full impact of the Bush proposal.

“The need to replace the 30-year Treasury bond interest rate used for pension calculations is the most pressing issue facing employers that sponsor defined benefit plans and the individuals who rely on them. Immediate action is required to correct the problem,” testified Kenneth Porter, Director, Corporate Insurance and Global Benefits Financial Planning for Dupont Company, testified on behalf of a group of trade organizations representing a wide spectrum of American businesses, including the American Benefits Council (ABC), the ERISA Industry Committee, the National Association of Manufacturers (NAM), the Committee on Investment of Employee Benefit Assets (CIEBA), Financial Executives International (FEI), the Business Roundtable and the US Chamber of Commerce.

Further encouragement came from a statement by Ann Combs, Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA), “One of the Bush Administration’s hallmarks has been an aggressive agenda to improve retirement security.   Defined benefit plans are an important source of guaranteed retirement income and must be encouraged.   Benefit promises made to workers and retirees must be kept.”

“Workers, retirees and financial markets need accurate and timely information,” Combs added.

Accuracy was also the objective of Peter Fisher’s contention that the proposal was needed.   The nation’s top domestic finance official, disputing criticisms of over complexity, told the joint committee that the plan to replace the 30-year bond as a pension funding benchmark would benefit workers and companies alike.   “The primary goal of the administration’s proposal to replace the 30-year Treasury rate can be summed up in one word: accuracy,” Fisher said.

However, there appears to be dissention among the ranks in what the best course of action is in getting from Point A to Point B.   As the proposal now stands, for the first two years, the pension contribution rate would be calculated from a new interest rate benchmark based on long-term conservative corporate bond rates, as proposed in reform legislation put forward by Representatives Benjamin Cardin (D-Maryland) and Rob Portman (R-Ohio) (See  Unfinished Business, Regulatory Relief Top Portman/Cardin Bill ).

After a two-year transition, however, the administration's proposal goes off in another direction.  At that point, firms would have to start phasing in calculations that take into account when their pension bills would actually come due, using different points on the corporate bond yield curve (See  Experts Say Administration Pension Proposal A Step in the Right Direction, But… ).   The phase-in would be complete by the fifth year.

For these reasons, Porter does not see a reason to move past the original Portman-Cardin solution embodied inthe Pension Preservation and Savings Expansion Act of 2003 (HR 1776):   the permanent replacement of the30-year Treasury bond rate with the rate of interest earned on conservative long-term corporate bonds. "A yield curve regime would represent a very significant change in our pension system," Porter said. "We believe the yield curve would exacerbate funding volatility, increase pension plan complexity, and make it more difficult for business that sponsor defined benefit plans to plan and predict their pension funding obligations."

Instead, Porter sees the answer in "the use of a composite corporate bond interest rate," that he sees enjoying, "strong, bipartisan backing, and has support across the ideological spectrum. Use of a composite, high-quality corporate bond rate will appropriately measure pension liability, improve predictability of plan obligations, and is consistent with the pension rules previously adopted by Congress."

Further echoing these sentiments was James Klein, president of the American Benefits Council, who stated, "The Council has very significant concerns about the yield curve approach recommended as a permanent replacement."   Klein pointed to the fact that the yield curve concept is only a concept that is highly complex and presents monumental hurdles in explaining their inner workers to plan sponsors - much less have them implement. Many of these companies already see the current morass of rules as reason to abandon their defined benefit programs.   Further, the larger the employer the worse it appears, since each plan will be required to use a different rate of measurement for its particular liabilities, already detrimental plan costs will skyrocket.

Other Thoughts

Outside of the committee room, Federal Reserve Chairman Alan Greenspan offered up his opinion on the proposal.    "The suggestions of the Secretary of the Treasury do advance the process," Greenspan said during an appearance before a House panel as part of his twice-a-year testimony on monetary policy.  Further, Greenspan added,the proposal - especially after it is fully phased in - is "clearly superior" to the current system.

But he also said the company pension rules are "more complex than we need."

Donald Segal, chief research actuary with the Segal Company, agrees that plan sponsors would be looking at a more complicated plate under the Bush proposals.  "It's going to add an administrative burden," because of complexities associated with such an idea, as well as the current lack of clarification and guidance offered by the administration's initial proposal.  "It's not clear if they are talking about an individual yield curve for everyone, and if that's what it means how can that be simple?" 

A copy of the administration's proposals can be found at    http://www.treas.gov/press/releases/js529.htm.