Falling Bond Rates Inflate DB Plan Liabilities
Employee Benefit News (12/01) Vol. 15, No. 15 p.1; Gunsauley, Craig

Low interest rates are significantly increasing government-required liability computations for defined benefit plans, causing employer organizations to push Congress for a change. Sponsors of pension plans are witnessing rapidly mounting liabilities in their plans as a result of an ongoing drop in the 30-year Treasury bond employed to determine minimum funding mandates for the Pension Benefit Guarantee Corp. (PBGC) and present liability rates for the Internal Revenue Service. Employer organizations would like Congress to provide a benchmark rate that better signifies market conditions when figuring pension plan liabilities. Although American Benefits Council vice president of retirement policy James Delaplane concedes the chances of getting a change in the assumptions in the economic stimulus bill are small, he believes that Congress and the Bush administration may introduce legislation in early 2002. Mark Ugoretz, president of Washington, D.C.-based ERISA Industry Committee, says the unnaturally low 30-year Treasury rate is pushing employers to make unneeded contributions that they cannot afford. Typically, when interest rates drop, equity markets rise in a balancing effect. But because of the recession and instability over the campaign against terrorism, stock prices can have a compounding impact on determined liabilities, according to PricewaterhouseCoopers' Unifi Network subsidiary principal Larry Sher. He notes, however, that because the government has been releasing fewer 30-year Treasuries in the past couple of years and completely halted sale of the bond in 2001, the interest rate yields on these calculators "don't necessarily reflect reality." He adds that the massive losses in equity holdings of 401(k) plans will alter numerous attitudes toward set contribution plans that put all of the investment burden on individual participants.

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