Firms Want to Change Rate Used in Pension Calculations
The 30-year Treasury bond has long been the symbol of reliability in the credit markets, the bond everybody wants for long-term safety.</br></br>Its interest rate is also used in pension law to make two key calculations in traditional plans: the present value of promised future benefits -- a plan's liabilities -- and the size of a lump- sum payment when a worker chooses one instead of a lifetime stream of income, known as an annuity.</br></br>Now, the stability of the "long bond," coupled with its dwindling supply since the Treasury stopped issuing it, has driven its price up and its interest rate to historic lows. For corporations, that is bad news. The low interest rate means higher pension liabilities and larger lump-sum payouts.</br></br>Companies that operate "defined benefit" pension plans are pressing Congress to change the rate used in federal pension law from the 30-year bond to a rate based on high-grade corporate bonds - - which typically carry higher interest rates. That would mean lower pension liabilities for companies and lower lump-sum payments for workers.</br></br>The debate takes place as more employers are dropping traditional pension plans in favor of 401(k)s, which don't guarantee a particular benefit. And it highlights the tightrope the government must walk in seeking to keep pensions safe without encouraging companies to drop their plans.