Companies are considering terminating their defined benefit (DB) pension plans due to the low 30-year US Treasury bond interest rates, according to the American Academy of Actuaries.
According to James Turpin, vice president for pensions, and Ron Gebhardtsbauer, senior pension fellow at the Academy, the low 30-year Treasury rates distort the employer contribution requirements for the proper funding of defined benefit pension plans. As a result, companies will have to make larger contributions to keep their plans fully funded.
Turpin and Gebhardtsbauer also warned that as the low rates make what would otherwise be fully funded plans appear underfunded, employers would have to pay more in higher Pension Benefit Guarantee Corporation (PBGC) insurance premiums.
Due to the dramatic decreases in 30-year Treasury rates, Turpin and Gebhardtsbauer said many employers are considering terminating their DB plans due to increased funding requirements and these added liabilities.
Research conducted by the Academy stated that the 30-year Treasury rate was 5.68%, compared with an expected rate of about 6.5%, based on historic rates. The lower Treasury rate — the result of the American government's drive to reduce the national debt — means an increase of between 8% and 25% in DB plan liabilities, depending on average employee age, according to the paper.
The pair also said that the Academy plans to lobby legislators to consider an alternative to the 30-year Treasury benchmark. Currently, US company pension funds are compelled to use 30-year Treasuries in pension calculations by the US Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA).
The PBGC is a product of the 1974 ERISA legislation, and is designed to encourage the continuation and maintenance of defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum.
In the event that a company fails, and its retirement plan is underfunded, the PBGC takes over the running of the fund. The organisation is not funded by tax revenues - instead it collects insurance premiums from employers that sponsor insured pension plans. It earns money from investments and receives funds from pension plans it takes over.
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