Impact of Elimination of 30–year Treasury Bonds
Prepared By: Eugene A.
Ferreri, Jr.
First Citizens Bank
Raleigh, North Carolina
Many calculations, including the valuation of current liabilities, needed to administer defined benefit retirement plans require the use of an interest rate assumption or benchmark by the actuary. After years of using rates supplied by the Pension Benefit Guaranty Corporation (PBGC), Congress mandated the use of the 30-year Treasury bond rate for this purpose. This was meant to create a rate, which was more closely tied to real world rates.
On October 31, 2001, the Treasury Department announced that it was suspending issuance of 30-year bonds. This action really had two impacts. First, it created an immediate need for a new benchmark. Second, it brought to a head issues surrounding a perceived inadequacy of the 30-year rate. The rate, over the last several years, has fallen to historical lows. This means that plan sponsors are making larger contributions and underfunded plans are paying higher variable premium rates to the PBGC. In a time of a weakened economy, these increased costs have brought calls from members of Congress, the American Academy of Actuaries, the American Benefits Council and others to enact through legislation or regulation a more appropriate short-term measure. In addition, there have been calls for a careful reexamination of the whole issue to determine a suitable long-term replacement. Some of the economic stimulus bills proposed on Capitol Hill contain measures to create a short-term fix to the problem. However, there is no sign that any such legislation will become law in the near future. This is an issue which should be watched by benefit professionals.