Private Pensions
Process Needed to Monitor the Mandated Interest Rate for Pension Calculations
Gao ID: GAO-03-313 February 27, 2003
Employers with defined benefit plans have expressed concern that low interest rates were affecting the reasonableness of their pension calculations used to determine funding requirements under the Employee Retirement and Income Security Act of 1974 (ERISA). ERISA requires employers to use a variation of the 30-year Treasury bond rate for these calculations; however, in 2001 Treasury stopped issuing the 30-year bond. This report provides information on (1) what characteristics of an interest rate make it suitable for determining current liability and lump-sum amounts; (2) what alternatives to the current rate might be considered; and (3) how using an alternative rate might affect plan participants, employers, and the Pension Benefit Guaranty Corporation (PBGC).
GAO analysis indicates the Congress intended that the interest rates used in current liability and lump-sum calculations should reflect the interest rate underlying group annuity prices and not be vulnerable to manipulation by interested parties. In 1987, 30-year Treasury bond rates appeared to have both of these characteristics. However, the Department of the Treasury stopped issuing new 30-year Treasury bonds in 2001. Actuaries and other pension experts have proposed a number of alternative interest rates, including alternatives based on interest rates set in various credit markets--including composite rates for long-term Treasury securities, long-term high-quality corporate bond indices, 30-year rates on securities issued by government-sponsored enterprises, such as Fannie Mae, 30-year interest rate swap rates--and PBGC interest rate factors based on surveys of insurance company group annuity purchase rates. Each alternative has attributes that may make it more or less suitable as an interest rate for the calculation of current liabilities, PBGC premiums, and lump-sum amounts. Additionally, the relationship of any interest rate to the underlying group annuity purchase rates may change over time and, unless the relationship is periodically evaluated, the Congress may be unable to appropriately respond to those changes. If the alternative interest rate selected to replace the current statutory rate immediately results in a higher interest rate level, which is likely, it would generally lower participant lump-sum amounts, lower minimum employer funding requirements, and reduce PBGC premium revenue. However, if the alternative interest rate produces a lower interest rate level, plan participants would generally receive larger lump sums, some employers would need to increase contributions to their plans, and PBGC may experience an increase in revenue.
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GAO-03-313, Private Pensions: Process Needed to Monitor the Mandated Interest Rate for Pension Calculations
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Report to Congressional Requesters:
United States General Accounting Office:
GAO:
February 2003:
Private Pensions:
Process Needed to Monitor the Mandated Interest Rate for Pension
Calculations:
GAO-03-313:
GAO Highlights:
Highlights of GAO-03-313, a report to
Congressional Requesters:
Why GAO Did This Study:
Employers with defined benefit plans have expressed concern that
low interest rates were affecting the reasonableness of their pension
calculations used to determine funding requirements under the
Employee Retirement and Income Security Act of 1974 (ERISA).
ERISA requires employers to use a variation of the 30-year Treasury
bond rate for these calculations; however, in 2001 Treasury stopped
issuing the 30-year bond. This report provides information on
(1) what characteristics of an interest rate make it suitable for
determining current liability and lump-sum amounts; (2) what
alternatives to the current rate might be considered; and (3) how
using an alternative rate might affect plan participants, employers,
and the Pension Benefit Guaranty Corporation (PBGC).
What GAO Found:
GAO analysis indicates the Congress intended that the interest rates
used in current liability and lump-sum calculations should reflect the
interest rate underlying group annuity prices and not be vulnerable to
manipulation by interested parties. In 1987, 30-year Treasury bond
rates appeared to have both of these characteristics. However, the
Department of the Treasury stopped issuing new 30-year Treasury bonds
in 2001.
Actuaries and other pension experts have proposed a number of
alternative interest rates, including alternatives based on interest
rates set in various credit markets”including composite rates for
long-term Treasury securities, long-term high-quality corporate bond
indices, 30-year rates on securities issued by government-sponsored
enterprises, such as Fannie Mae, 30-year interest rate swap rates”and
PBGC interest rate factors based on surveys of insurance company group
annuity purchase rates. Each alternative has attributes that may make
it more or less suitable as an interest rate for the calculation of
current liabilities, PBGC premiums, and lump-sum amounts.
Additionally, the relationship of any interest rate to the underlying
group annuity purchase rates may change over time and, unless the
relationship is periodically evaluated, the Congress may be unable to
appropriately respond to those changes.
If the alternative interest rate selected to replace the current
statutory rate immediately results in a higher interest rate level,
which is likely, it would generally lower participant lump-sum amounts,
lower minimum employer funding requirements, and reduce PBGC premium
revenue. However, if the alternative interest rate produces a lower
interest rate level, plan participants would generally receive larger
lump sums, some employers would need to increase contributions to
their plans, and PBGC may experience an increase in revenue.
What GAO Recommends:
GAO is not recommending executive action. However, in order
to allow the Congress an opportunity to respond
expeditiously to changes in interest rates that might affect the
reasonableness of defined benefit pension calculations, the Congress
may wish to consider providing the cognizant regulatory agencies (the
Department of the Treasury, PBGC, and the Department of Labor) the
authority to jointly adjust the rate within certain boundaries as
specified under the law.
Contents:
Letter:
Results in Brief:
Background:
Interest Rate Should Reflect Group Annuity Purchase Rates:
Alternative Interest Rates Have Advantages and Disadvantages Compared
with Treasury Bond Rates:
Alternatives Likely to Decrease Lump-Sum Payments, Employer
Contributions, and PBGC Revenue:
Conclusions:
Matters for Congressional Consideration:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Group Annuity Purchase Rate Would Be Affected by Cash Flow
Projection and Yield Curve at Termination:
Cash Flows Vary by Plan:
Group Annuity Purchase Rates Would Vary with the Yield Curve:
Appendix III: Comments from the Department of Treasury:
Table:
Table 1: Characteristics of Proposed Alternatives that Affect Their
Suitability as an Interest Rate for Pension Calculations:
Figures:
Figure 1: Interest Rates and Weighted Average Rates on 30-Year Treasury
Bonds and Highest and Lowest Allowable Interest Rates for Current
Liability Calculations, 1987 to 2002:
Figure 2: Annual Long-Term Applicable Federal Rate and 30-Year Treasury
Bond Rate, 1987 to 2002:
Figure 3: Long-Term, High-Quality Corporate Bond and 30-Year Treasury
Bond Rates, 1987 to 2002:
Figure 4: PBGC Interest Rate Factors and 30-Year Treasury Bond Rates,
1987 to 2002:
Figure 5: Thirty-Year Treasury Bond Rates and Proposed Alternative
Interest Rates, 1994 to 2002:
Figure 6: Percent Change in Lump Sums for Participants Retiring in 40
Years or Less for an Interest Rate Increase from
5 Percent to 6 Percent:
Figure 7: Effect of a 1-Percentage Point Increase in the Interest Rate
on the Funded Percentage of a Hypothetical Plan with a Typical
Participant Distribution:
Figure 8: Projected Cash Flow for Sample Defined Benefit Plan for the
First 40 Years after Plan Termination:
Figure 9: Yield Curves for On-the-Run and Zero-Coupon Treasury
Securities as of February 6, 2003:
Abbreviations:
ACLI: American Council of Life Insurers:
ERISA: Employee Retirement Income Security Act of 1974:
FNMA: Federal National Mortgage Association:
GSE: government-sponsored enterprises:
IRC: Internal Revenue Code:
IRS: Internal Revenue Service:
LIBOR: London Interbank Offer Rate:
PBGC: Pension Benefit Guaranty Corporation:
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United States General Accounting Office:
Washington, DC 20548:
February 27, 2003:
The Honorable George Miller
Ranking Minority Member
Committee on Education and the
Workforce
House of Representatives:
The Honorable Robert Andrews
Ranking Minority Member
Subcommittee on Employer-Employee
Relations
Committee on Education and the Workforce
House of Representatives:
In 2001, groups representing employers with defined benefit plans
expressed concern that low interest rates were affecting the
reasonableness of their pension calculations.[Footnote 1] Under the
Employee Retirement Income Security Act of 1974 (ERISA), as amended,
and the Internal Revenue Code (IRC), these calculations affect how much
employers are allowed or required to contribute to their pension plans,
how much employers must pay to the Pension Benefit Guaranty Corporation
(PBGC) for federal insurance of the benefits promised by the
plan,[Footnote 2] and how much plan participants receive when pension
benefits are distributed in a lump sum.[Footnote 3] When making such
calculations, the laws require that employers use interest rates on 30-
year Treasury bonds, or interest rates that are based on 30-year
Treasury bond rates. Specifically, the laws require employers to use:
* an interest rate from within a permissible range of a 4-year weighted
average of 30-year Treasury bond rates to calculate a plan‘s total
liability, termed the plan‘s current liability, and to use that
calculation to assess its funding level.[Footnote 4] If plans are
funded below certain thresholds as defined in the IRC, employers are to
determine minimum contribution amounts on the basis of those
assessments.[Footnote 5] If a plan is fully funded as defined in the
law, employers are precluded from making additional tax-deductible
contributions to the plan.[Footnote 6]
* the interest rate on 30-year Treasury bonds to assess a plan‘s
funding level and, if required, pay an additional premium, termed the
variable-rate premium, to PBGC for federal insurance of their plan‘s
benefits.[Footnote 7]
* the interest rate on 30-year Treasury bonds to determine the minimum
and maximum values of lump-sum distributions, and whether a benefit can
be distributed as a lump sum without a participant‘s consent.[Footnote
8] When determining the minimum lump-sum distribution payable, the 30-
year Treasury rate is the highest rate that an employer can use in
making the calculation.
Generally, the interest rates specified in the law were intended,
within certain parameters, to reflect the price an insurance company
would charge to take responsibility for the plan‘s pension
payments.[Footnote 9] The price that insurance companies would charge
employers for this service reflects current interest rates, the
expected mortality and retirement rates of participants for the plans
they are considering, and the insurance companies‘ expected expenses
and required profit. These factors may be expressed as a single rate,
called the group annuity purchase rate, which is the interest rate
underlying the actual group annuity price. In the late 1990s, when
fewer 30-year Treasury bonds were issued and economic conditions
increased demand for the bonds, the 30-year Treasury rate diverged from
other long-term interest rates, an indication that it also may have
diverged from group annuity purchase rates. In 2001, Treasury stopped
issuing these bonds altogether, and in March 2002, the Congress enacted
temporary measures to alleviate employer concerns that low interest
rates on the remaining 30-year Treasury bonds were affecting the
reasonableness of the interest rate for employer pension
calculations.[Footnote 10] To help the Congress decide what, if any,
additional measure to take, you asked us to determine: (1) what
characteristics of an interest rate would make it suitable for
determining current liability and lump-sum amounts; (2) what
alternatives to the current interest rate might be considered; and (3)
how using an alternative rate might affect plan participants,
employers, and PBGC.
To determine the characteristics of a suitable interest rate, we
reviewed pension laws and their legislative history with respect to the
calculation of current liability and lump-sum amounts. We also
interviewed Labor, Treasury, and PBGC officials who might play a role
in assessing alternative interest rates. To identify and examine the
advantages and disadvantages of potential alternative interest rates,
we interviewed representatives and reviewed documents from a number of
government, actuarial, pension plan sponsor, and investment entities.
We also compared rates and other market statistics for suggested
alternative debt securities with rates for
30-year Treasury bonds from 1987 to 2002. To determine how alternative
rates might affect employers, plan participants, and PBGC, we created
hypothetical examples, based on discussions with actuaries and pension
consultants, in which we tested the effect of changes in rate levels on
current liabilities and lump-sum payments. We did not assess
alternative methods for specifying interest rates. For example, we did
not assess whether the interest rate for current liability calculations
should be specified as a 4-year weighted average or current market
rate. Our scope and methodology is explained more fully in appendix I.
Results in Brief:
Our analysis of the law and related congressional documents, and
discussions with PBGC and Treasury officials, indicate that the
interest rates used in current liability and lump-sum calculations were
to have two characteristics. They were to: (1) reflect group annuity
purchase rates and (2) not be vulnerable to manipulation by interested
parties. In 1987,
30-year Treasury bond rates appeared to have both of these
characteristics. While group annuity purchases are private transactions
and information about actual group annuity rates is not available,
several actuaries said that, in 1987, 30-year Treasury bond rates
appeared to be reasonably close to actual group annuity purchase rates.
Additionally,
30-year Treasury bonds were actively traded in large markets, which
meant that interested parties could not easily manipulate their rates.
Also, federal agencies collected and compiled trade information for
Treasury securities and published their rates, which provided further
assurance that rates could not be manipulated.
Actuaries and other pension experts have proposed a number of
alternative interest rates for pension calculations. Most alternatives
were based on interest rates set in various credit markets--including
composite rates for long-term Treasury securities; long-term, high-
quality corporate bond indices; 30-year rates on securities issued by
government-sponsored enterprises (GSEs), such as Fannie Mae; and 30-
year interest rate swap rates. One alternative, PBGC interest rate
factors, was based on surveys of insurance company group annuity
purchase rates. Each alternative has characteristics that may make it
more or less suitable as an interest rate for current liability and
lump-sum calculations. During periods of financial uncertainty, for
example, Treasury rates‘ proximity to group annuity purchase rates
might be adversely affected if investors‘ demand for risk-free
securities increases, causing Treasury rates to decline relative to
other long-term rates. On the other hand, the market is well
established and Treasury debt has the backing of the federal
government, and, therefore, its rates may be considered more
trustworthy than other alternatives. In contrast, insurance companies
offering group annuities tend to invest their premium income in
corporate debt rather than in other securities, and have a similar
credit rating to GSEs and interest rate swap rates. Therefore, rates on
these securities might better track changes in group annuity purchase
rates, but private rates might be perceived to be more vulnerable to
manipulation or more complex than Treasury rates. The PBGC interest
rate factors were specifically developed to approximate group annuity
purchase rates. However, PBGC interest rate factors are based on
confidential surveys, and PBGC‘s rate calculations are not published or
independently verified, which might make them more vulnerable to
manipulation than other alternatives. For any of the market-based
interest rates, the relationship to group annuity purchase rates may
change over time. Unless the relationship is periodically evaluated,
the Congress may be unable to appropriately respond to those changes.
If the alternative interest rate selected to replace the current rate
results immediately in a higher rate level, which is likely, it would
generally lower participant lump-sum amounts, lower minimum employer
funding requirements, and reduce PBGC premium revenue. A higher
interest rate lowers each of these amounts because it increases the
value of today‘s dollars, relative to future dollars, and therefore
fewer of today‘s dollars should be needed to pay benefits in the
future. However, if the alternative interest rate produces a lower rate
level, plan participants would receive larger lump sums, some employers
would need to increase contributions to their plans, and PBGC may
experience an increase in revenue. The magnitude of these effects would
depend on the characteristics of the plan and its participants and how
the rate is specified in the law. For example, if the rate were to
increase and a high percentage of the participants in the plan were far
from the plan‘s normal retirement age, the percentage decrease in
employer contributions would be greater than if the participants were
closer to retirement or already retired. Additionally, if the Congress
specifies the interest rate differently for current liability and lump-
sum calculations, as is currently the case, the magnitude of the impact
on each could differ.
Because the choice of the statutory interest rate has important
implications for federal revenue, employer cash flow, and participant
retirement income, this report contains matters for congressional
consideration concerning the ability of the Congress to respond
expeditiously to changes that may affect the relationship between the
interest rate and group annuity purchase rates.
Background:
Interest rates are key assumptions in calculating the present value of
promised future pension benefits.[Footnote 11] When interest rates are
lower, more money is needed today to finance future benefits because it
will earn less income when invested. At a 6-percent interest rate, for
example, a promise to pay $1.00 per year for the next 30 years has a
present value of about $14. If the interest rate is reduced to 1.0
percent, however, the present value of $1.00 per year for the next 30
years increases to about $26 because the $26, when invested, will earn
the relatively small income associated with a 1-percent interest rate.
Therefore, lower interest rate assumptions result in higher current
liability and lump-sum amounts.
The interest rate appropriate for measuring the present value of a
plan‘s pension liabilities may differ depending on a number of factors,
including the purpose of the measurement. For example, the interest
rate appropriate for measuring the present value of a plan‘s pension
liabilities on an ongoing basis may reflect the assumed rate of return
that the plan is expected to achieve on the investment of its
assets.[Footnote 12] On the other hand, the interest rate appropriate
for measuring the present value of that same plan‘s pension liabilities
at plan termination may reflect interest rates implicit in annuity
purchase rates.[Footnote 13]
Before ERISA, few rules governed the funding of defined benefit plans,
and there were no guarantees that participants would receive promised
benefits. When the pension plan of a major automobile manufacturer
failed in the 1960s, for example, thousands of defined benefit plan
participants lost their pensions. As part of ERISA, the Congress
established PBGC to pay pension benefits in the event that an employer
could not. In addition to establishing PBGC, ERISA and IRC require
employers to make minimum contributions to under-funded plans and
prevent employers from making tax-deductible contributions to plans
exceeding specified funding limits.[Footnote 14]
Subsequently, concerns were raised about the potential claims that PBGC
might face from the termination of plans that had insufficient assets
to pay promised benefits. In an effort to improve plan funding and
protect PBGC, IRC funding rules were amended in 1987 to require that
employers show they were accumulating sufficient funds should they need
to terminate their plan and contract with an insurance company to take
responsibility for future pension payments. The 1987 amendment required
that employers calculate each plan‘s current liability as the sum of
the present values of each participant‘s accrued benefits,[Footnote 15]
and to calculate the present values as if the plan were to terminate at
the end of the plan year. To make this calculation, the amendment
stated that the interest rate used under the plan shall be: ’consistent
with the assumptions which reflect the purchase rates which would be
used by insurance companies to satisfy the liabilities under the
plan.“[Footnote 16] The law also stated that the selected interest rate
must be within a specified range of a weighted average of interest
rates on 30-year Treasury bonds. The Conference Committee report
accompanying the amendment stated, however, that the specified range
was not intended to be a ’safe harbor“ with respect to whether the
interest rate is reasonable. The report stated:
’. . . the determination of whether an interest rate is reasonable
depends on the cost of purchasing an annuity sufficient to satisfy
current liability. The interest rate is to be a reasonable estimate of
the interest rate used to determine the cost of such annuity, assuming
that the cost only reflected the present value of the payments under
the annuity (i.e., and did not reflect the seller‘s profit,
administrative expenses, etc.). For example, if an annuity costs
$1,100, the cost of $1,100 is considered to be the present value of the
payments under the annuity for purposes of the interest rate rule, even
though $100 of the $1,100 represents the seller‘s administrative
expenses and profit. In making the determination with respect to the
interest rate . . . other factors and assumptions (e.g., mortality) are
to be individually reasonable.“[Footnote 17]
In 1987, the range of permissible interest rates was from 10-percent
below to 10-percent above the weighted average 30-year Treasury bond
rate. In 1994, IRC was amended to reduce the upper limit of the
permissible range of interest rates from 10 percent to 5 percent above
weighted average rate.[Footnote 18] The House Report accompanying the
bill stated that the 1987 legislation was intended to address the
chronic under-funding of pension plans that had persisted since passage
of ERISA.[Footnote 19] However, when measuring current liability, plans
could decrease contributions by choosing an interest rate at the high
end of the range. According to the report, the highest allowable
interest rate was reduced to 105 percent to minimize a plan‘s ability
to decrease its current liability through the choice of interest rates.
Additionally, in 1994, IRC was amended to require that employers
determine the minimum value of certain optional forms of benefit, such
as lump sums, using an interest rate no higher than the interest rate
for
30-year Treasury bonds. To prevent employers from exceeding the maximum
lump-sum payment specified by law,[Footnote 20] IRC also required
employers to use an interest rate no lower than 30-year Treasury bond
rates when calculating lump sums for certain highly paid employees. The
Congress enacted the amendment for a number of reasons, including to
ensure that rates for determining lump-sum payments better reflected
prices in the insurance annuity market.[Footnote 21]
Figure 1 shows, for 1987 to 2002, the range of allowable rates for
current liability calculations and the allowable interest rates for
lump-sum calculations. In November 2002, for example, the interest rate
for 30-year Treasury bonds was 4.96 percent. That month, the 4-year
weighted average rate for 30-year Treasury bonds was 5.58 percent, and
the range of allowable interest rates for current liability
calculations was 5.02 percent to 6.70 percent.
Figure 1: Interest Rates and Weighted Average Rates on 30-Year Treasury
Bonds and Highest and Lowest Allowable Interest Rates for Current
Liability Calculations, 1987 to 2002:
[See PDF for image]
[End of figure]
Note: In 2002, IRC was amended to increase the highest allowable rate
to 120 percent of the 4-year weighted average.
Interest Rate Should Reflect Group Annuity Purchase Rates:
Our analysis of the law and related congressional documents, and
discussions with PBGC and Treasury officials, indicates that the
interest rates used in current liability and lump-sum calculations were
to have two characteristics. They were to: (1) reflect group annuity
purchase rates and (2) not be vulnerable to manipulation by interested
parties. Because actual group annuity purchase rates are unknown, the
Congress specified rates to regulate an employer‘s selection of an
interest rate. While 30-year Treasury rates may have been close to
group annuity purchase rates in 1987, PBGC was not aware of any
available studies that documented that proximity. Officials said that,
in addition to their possible proximity to group annuity purchase
rates, the Congress adopted 30-year Treasury bond rates as the basis
for interest rates because they could not be easily manipulated by
interested parties. In this regard, Treasury bonds were actively traded
in large markets and interest rate data for them were available from
government sources, which helped ensure that the rates accurately
represented market conditions and could not be easily manipulated by
interested parties. However, the Department of the Treasury stopped
issuing new 30-year Treasury bonds in 2001.
Information on Actual Group Annuity Purchase Rates Is Not Available:
Information needed to determine actual group annuity purchase rates is
not available because annuity purchases are private transactions
between insurance companies and employers who terminate their pension
plan. To terminate a defined benefit plan, an employer determines the
benefits that have been earned by each participant up to the time of
plan termination and purchases a single-premium group annuity contract
from an insurance company, under which the insurance company guarantees
to pay the accrued benefits when they are due. The insurance company
determines the employer‘s premium by analyzing participant demographics
and making assumptions about a number of variables, including:
* Interest rates. The assumed interest rate is used to determine the
present value of projected benefit payments and costs at the annuity
purchase date. Rates reflect current market rates for the securities in
which the company is likely to invest the premium paid by the plan:
generally fixed income securities, such as corporate bonds and
mortgage-backed securities, with a relatively low credit risk.[Footnote
22] Interest rate assumptions may vary according to a number of factors
at plan termination, including the projected cash flow of the plan and
the yield curve on relevant securities.[Footnote 23](See app. II.)
Interest rates are adjusted to produce the insurer‘s target level of
capital requirements and profits from the annuity.
* Mortality rates. The assumed mortality rate reflects death rates
associated with known or assumed characteristics of the participant
population, with some adjustments to account for future potential
improvements in mortality.[Footnote 24]
* Administrative expenses, taxes, and other costs. Administrative
expenses for annuities include the cost of setting up accounts and
tracking payments. Many insurers assume a flat rate for each annuitant
in pricing some administrative expenses, such as account set-up
charges. Some insurers reduce their interest rate assumption to account
for those expenses.
Information about insurance company assumptions, or premium payments
and projected benefits, would be needed to estimate actual group
annuity purchase rates; however, this information is often not
available publicly.[Footnote 25] For example, employers who decide to
terminate their pension plans typically contact a broker or consultant
who then solicits bids for a group annuity contract from qualified
insurance companies. Insurance companies bid on the contract through
the broker or consultant. Negotiations or an auction may take place,
which may further affect the price. Insurance companies typically do
not disclose assumptions made during this process.
Thirty-Year Treasury Bonds Had Desirable Characteristics, but Are No
Longer Issued:
Thirty-year Treasury bonds had several desirable characteristics when
they were selected to approximate group annuity purchase rates in 1987.
For example, the American Academy of Actuaries said that in 1987, the
30-year Treasury bond rate plus 0.3 percentage points (30 basis
points[Footnote 26]) would have replicated group annuity purchase
rates.[Footnote 27] This would indicate that the difference between the
rate of return on 30-year Treasury bonds and the typical insurance
company investment (such as long-term, high-quality corporate bonds)
approximated the expenses and other annuity pricing factors that
insurance companies would consider. The extent to which 30-year
Treasury bond rates maintained their proximity to group annuity
purchase rates would depend upon how closely Treasury rates continued
to approximate insurance company investment rates of return, after
adjusting them for expected administrative expenses and other annuity
pricing factors.
Additionally, policymakers said that 30-year Treasury bond rates were
selected as the interest rate in 1987 in part because interested
parties could not easily manipulate Treasury rates. Two characteristics
of 30-year Treasury bonds that would indicate their rates could not be
easily manipulated were their ’transparency“ and ’liquidity.“:
* Thirty-year Treasury bond rates were transparent. For a rate to be
transparent, information about it must be widely available and
frequently updated. The Federal Reserve Board of Governors, using data
provided by the Department of the Treasury, published information on
30-year Treasury rates. The Department of the Treasury constructed 30-
year Treasury bond rates using data collected from private vendors and
reviewed and compiled by the Federal Reserve Bank of New York.
* Thirty-year Treasury bonds were liquid. For a bond to be liquid, the
market in which it is traded must be large and active so that isolated
events or erratic behavior by a single market participant are unlikely
to have a major effect on market prices. According to a senior market
analyst, the 30-year Treasury bond market in 1987 was likely the
deepest and most liquid market in low risk 30-year bonds in the world.
While 30-year Treasury bonds had several favorable characteristics when
they were selected to approximate group annuity purchase rates, their
issuance has since been suspended. The 30-year Treasury bond rates that
are currently used as an interest rate for pension calculations are
published by the Internal Revenue Service (IRS) based on rates for the
last 30-year Treasury bonds, which were issued in February 2001.
Alternative Interest Rates Have Advantages and Disadvantages Compared
with Treasury Bond Rates:
Actuaries and others have proposed a number of alternatives that could
be used to control the selection of interest rates for current
liability and lump-sum calculations, including (1) interest rates set
in credit markets for various securities, such as long-term Treasury
securities; long-term, high-quality corporate bonds; 30-year GSE bonds;
and 30-year interest rate swaps; and (2) PBGC interest rate factors
based on surveys of insurance company group annuity purchase rates. As
shown in table 1, each alternative has characteristics that affect its
likelihood of approximating group annuity purchase rates over time and
its potential vulnerability to manipulation. For example, the closer an
alternative‘s interest rate levels match the net return on investment
of insurance companies offering group annuities, the more likely that
alternative will match group annuity purchase rates. Similarly, the
closer the underlying credit rating of an alternative matches that of
an insurance company offering group annuities, the more likely that
alternative will match group annuity purchase rates.
Table 1: Characteristics of Proposed Alternatives that Affect Their
Suitability as an Interest Rate for Pension Calculations:
Feature: Closeness of relationship to group annuity purchase rates,
based on insurance company investments or credit rating; Interest rates
determined by credit markets: Long-term Treasury securities: During
periods of financial uncertainty, may fall below group annuity purchase
rates because of increased demand for Treasury securities.; Interest
rates determined by credit markets: Long-term, high-quality corporate
bonds: While insurance companies are believed to invest largely in
corporate bonds, may need to deduct for expenses and profit.; Interest
rates determined by credit markets: 30-year GSE securities: Credit
rating comparable to or higher than insurance companies that offer
group annuities.; Interest rates determined by credit markets: 30-year
interest rate swaps: Comparable credit rating and not callable.; PBGC
interest rate factors: Study indicates rate levels were close for some
plans between 1994 and 1997.; Constructed from surveys of insurance
companies‘ group annuity purchase rates, but includes information from
only two surveys annually.
Feature: Vulnerability to manipulation; Interest rates determined by
credit markets: Long-term Treasury securities: Government rate, based
on highly visible trading data in well-established, active market.;
Interest rates determined by credit markets: Long-term, high-quality
corporate bonds: Large market overall, but different issuing companies,
quality, and cash structures segment market.; New reporting system
likely to increase availability of trading data, but rates based more
on price estimates than on trades.; Interest rates determined by credit
markets: 30-year GSE securities: Market has perceived backing of
federal government.; Effort by Federal National Mortgage Association
(Fannie Mae) to increase availability of information underlying rates.;
Current market for Fannie Mae benchmark debt not very large or well
traded.; Interest rates determined by credit markets: 30-year interest
rate swaps: Very large, active market, with rates based on daily survey
of rates offered on new contracts.; However, concern about low market
volume at long maturities.; Relatively new market, perhaps more
difficult to understand.; PBGC interest rate factors: Rates based on
confidential survey and market representation of respondents is
unknown.; PBGC calculations are not published or independently
verified.
[End of table]
Source: GAO analysis.
Various calculations can be applied to any interest rate to make it
more suitable for its intended use. For example, each of the
alternatives could be specified as: (1) a single monthly interest rate,
which is currently the case for lump-sum calculations; (2) a corridor
of interest rates around the
4-year weighted average of a monthly rate, which is currently the case
for current liability calculations; or (3) a yield curve. According to
several actuaries and others, specifying the alternative as a yield
curve, instead of a single rate or corridor of rates around a weighted
average rate, would have advantages and disadvantages. For example,
specifying a yield curve might enable each plan to more closely
approximate its group annuity purchase rate, but doing so might
increase the difficulty of plan calculations and could prove relatively
costly for small plans.
Long-Term Treasury Securities:
The Department of the Treasury continues to construct rates for long-
term bonds that could be used as a basis for selecting interest rates
for current liability and lump-sum calculations. For example, the
Treasury Department constructs a rate, called the long-term applicable
federal rate, which approximates Treasury‘s borrowing costs for
securities with maturities exceeding 9 years. IRS publishes applicable
federal rates. Figure 2 compares the long-term applicable federal and
30-year Treasury bond rates from 1987 to 2002. As can be seen, the
differences between the two rates are generally less than 50 basis
points.
Figure 2: Annual Long-Term Applicable Federal Rate and 30-Year Treasury
Bond Rate, 1987 to 2002:
[See PDF for image]
[End of figure]
According to actuaries, insurance companies typically place group
annuity premiums in fixed-income investments that have a higher rate of
return than 30-year Treasury bonds. Treasury rates are lower than rates
for other fixed-income investments of the same maturity because
Treasury bonds have a lower credit risk.[Footnote 28] The proximity of
Treasury bond rates to group annuity purchase rates may vary with
changes in investor attitudes about credit risk. During periods of
financial uncertainty, for example, investors may have a sharply
heightened desire for safety, often referred to as a ’flight to
quality,“ which could cause Treasury rates to decline relative to rates
for other securities. Some investment analysts believe that one such
period began toward the end of the 1990s.
Despite concerns that long-term Treasury bond rates may not track
closely with group annuity purchase rates during periods of financial
uncertainty, Treasury bond rates retain some characteristics that may
continue to make them a desirable interest rate. The government
constructs the rates, and they are based on trades in large, active,
and highly visible markets. For example, debt securities markets have
shifted to the 10-year Treasury note to serve some of the same long-
term benchmark functions as the
30-year Treasury bond has served in the past.
Long-Term High-Quality Corporate Bond Index Rates:
Various financial investment firms construct indices of interest rates
for long-term, high-quality corporate bonds, which are debt securities
with maturity of 10 years or more issued by companies with relatively
low credit risk.[Footnote 29] Figure 3 compares interest rates for the
highest-quality corporate debt (bonds rated Aaa by Moody‘s Investor
Services), high-quality corporate debt (bonds rated Aa), and 30-year
Treasury bonds for the period 1987 to 2002. As can be seen, corporate
bonds with a Aa rating have higher interest rates than corporate bonds
with a Aaa rating and
30-year Treasury bonds.
Figure 3: Long-Term, High-Quality Corporate Bond and 30-Year Treasury
Bond Rates, 1987 to 2002:
[See PDF for image]
[End of figure]
Several actuaries and plan sponsor groups have suggested using one or
more indices for long-term, high-quality corporate bond rates as the
basis of an interest rate, while others suggest that these indices
require adjustments before they can be used. Because insurance
companies tend to invest in long-term corporate debt, these rates may
track changes in group annuity purchase rates. An industry
representative said that an unadjusted average of the indices would
reflect insurance company expenses and other group annuity pricing
factors because insurance companies typically achieve a higher rate of
return on investment than is indicated by high-quality corporate bond
rates. For example, investing in lower-quality bonds and private loans
might achieve a higher rate of return than investing in high-quality
corporate bonds. According to some actuaries, however, the indices
would need to be adjusted for insurance company expenses and other
factors before they would reflect the level of group annuity purchase
rates. For example, a study for the Society of Actuaries said that a
long-term corporate bond index rate minus 70 basis points would
reasonably approximate group annuity purchase rates.[Footnote 30]
However, the ERISA Industry Committee recommended using an average of
corporate bond indices published by four firms as the interest rate
without such an adjustment. Some actuaries and other pension experts
have suggested that rates on some corporate bond indices might also
need to be adjusted to make allowances for certain options before the
rates would reflect the level of group annuity purchase rates. For
example, corporate bonds are typically ’callable,“ meaning that the
issuer can recall a bond before its maturity date. Because this creates
some uncertainty to the holder of a corporate bond, this may also
increase corporate bond rates relative to group annuity purchase rates.
Corporate bond indices have properties that make them difficult to
manipulate, but the corporate bond market may not be as liquid and
transparent as the Treasury bond market. While the investment-grade
corporate bond market is very large overall, with over $700 billion in
issuance in 2001 and an estimated $4 trillion in outstanding value as
of the third quarter of 2002, the market is segmented by differences in
credit quality and issuer characteristics and, therefore, is less
liquid than a large unsegmented market such as the market for Treasury
securities. Additionally, interest rates for specific corporate bonds
are based on quotes by traders, who usually estimate the current
trading value of a bond and quote a rate based on its spread versus a
comparable Treasury security. However, information on which to base
corporate bond quotes is expected to become more widely available
through a National Association of Security Dealer‘s reporting system,
which was launched in July 2002 and reports many large recent
transactions. The new system may not alleviate all transparency
concerns. Some financial experts said that corporate bonds are not as
highly traded as other debt securities, which means that recent trades
are often not available to verify current market conditions and rates.
Certain corporate bond indices also have unique characteristics and
complexities that could affect their suitability as an interest rate.
Corporate bond indices are put together by private financial companies,
which then compute an interest rate for the index based on underlying
interest rates of the component bonds. Financial companies differ in
how publicly they share information on which bonds they include in an
index, how they weight component interest rates, and other factors and
calculations that influence the published rate. Further, the
reliability of the corporate indices can be affected by the reliability
of the data source--actual transactions, quotes, or estimates of values
or yields--on which they are based.
Thirty-Year Rates on GSE Securities:
Thirty-year rates on securities issued by GSEs are rates on bonds used
to finance home ownership and other public policy goals. GSEs are
private corporations, such as Federal National Mortgage Association
(also known as Fannie Mae), that have the implicit backing of the U.S.
government. In 1998, Fannie Mae began issuing debt through its
benchmark program, which is intended to be high-quality, noncallable,
actively traded debt. Fannie Mae attempts to issue benchmark debt
periodically and in large amounts, similar to how Treasury issued 30-
year bonds in the past.
Several pension experts have suggested using 30-year Fannie Mae bond
rates as the basis for the interest rate. Because GSE securities have
received a credit rating comparable to, or higher than, the credit
rating of the insurance companies that offer group annuities, GSE rates
may approximate group annuity purchase rates. GSE-issued debt is
generally of the highest credit quality but not considered credit-risk
free like Treasury securities. Therefore, GSE rates would typically be
expected to fall between Treasury rates and high-quality corporate
rates of comparable maturity.
Fannie Mae benchmark 30-year bond rates have properties that indicate a
low likelihood that interested parties could manipulate them, but the
securities have a relatively small market and relatively low trading
activity compared with the Treasury and corporate bond markets.
Outstanding volume of 30-year Fannie Mae benchmark debt was $14.9
billion as of December 2002, which was significantly less than the $589
billion in outstanding Treasury bonds as of November 30, 2002, and $4
trillion in outstanding long-term corporate bonds. According to Federal
Reserve data of market transactions by primary dealers, trading in
long-term GSE debt, which includes securities besides Fannie Mae
benchmark debt, has been approximately $1.1 billion per day in 2002,
which is much less than long-term Treasury securities. According to
some experts, GSE debt is expected to continue to grow. With regard to
transparency, Fannie Mae has also recently increased the availability
of information on trades underlying the rates on its securities, which
should increase rate transparency.
Thirty-Year Interest Rate Swaps Rate:
Thirty-year interest rate swap rates are fixed rates in a contract
between two parties, one of whom agrees to make fixed interest payments
based on a specified amount of money in exchange for interest payments
based on variable short-term rates on the same specified amount of
money for the duration of the contract. For example, one party might
agree to pay a
5 percent annual fixed rate on $1 million every year for the next 30
years in exchange for receiving a published 3-month interest rate that
changes periodically for the next 30 years on the same $1 million. The
30-year swap rate in this case would equal 5 percent, and the
predominant 30-year swap rate should move up and down with the expected
level of short-term interest rates over the next 30 years. The
’notional“ amount of money
($1 million in the example) does not typically change hands between the
counter parties in a swaps contract, and unlike most other fixed-income
markets, interest-rate swaps do not involve the issuance of debt. By
entering into a swap contract, the party that agreed to make fixed
interest rate payments can help offset potential risk from variable-
rate debt that it issues by making fixed interest payments in exchange
for variable-rate payments. The variable-rate payments that it receives
under the agreement can then be used to pay its debt holders. If
interest rates go up, the debt issuer pays higher debt service payments
but also receives higher interest payments from the swap agreement.
Several pension experts have considered using 30-year interest rate
swap rates as the basis for current liability and lump-sum
calculations. Interest-rate swaps contracts are generally perceived to
contain low credit risk for two reasons. First, the two parties
involved in the contract typically have high credit ratings. Second,
swap contracts typically use the London Interbank Offer Rate (LIBOR) as
the floating rate, and the LIBOR has a low credit risk. The overall
credit quality underlying LIBOR-based, interest-rate swap rates is
likely comparable to that of high-quality corporate bonds. However,
unlike some corporate bonds, swaps are not callable, so their rates
would not need to be adjusted for such options and typically would be
expected to fall below those on high-quality corporate bonds of similar
maturity. The credit rating of insurance companies in the group annuity
market is generally Aa or better. Interest rate swaps might give an
accurate indication of an insurance company‘s cost of borrowing funds.
The interest rate swap market has characteristics that likely protect
rates from potential manipulation. The swap market is considered to be
very active, although the trading volume and amount outstanding for
longer maturity interest rate swaps are believed to be low, relative to
shorter maturities. The Federal Reserve Board publishes 30-year
interest rate swap rates daily based on a private survey of quotes on
new contracts offered by 16 large swaps dealers, and quotes on swaps
contracts are updated throughout the day and visible via subscription
services. A unique advantage of using swaps as an interest rate is that
swaps do not require the issuance of debt; rather, swap rates reflect
contracts between two parties. Because new contracts are produced every
day, it is easier to update 30-year swap rates than other rates
involving the issuing of debt, which happens only periodically. The
international swaps market represents the largest of the alternatives
considered, with an outstanding dollar-denominated value of swaps
contracts estimated at approximately $20 trillion, with many new
transactions conducted between parties every day. However, some experts
have expressed concern about using the
30-year interest rate swaps because the swaps market is relatively new
and the outstanding trading volume of 30-year interest rate swaps is
believed to be much lower than for shorter maturity contracts.
PBGC Interest Rate Factors:
Of all the alternative rates, PBGC‘s interest rate factors have the
most direct connection to group annuity purchase rates. Figure 4 shows
that the proximity of PBGC interest rate factors to 30-year Treasury
bond rates varied from 1987 through 2002.
Figure 4: PBGC Interest Rate Factors and 30-Year Treasury Bond Rates,
1987 to 2002:
[See PDF for image]
[End of figure]
Note: PBGC interest rate factors have been set back 2 months because
published rates reflect interest rates approximately 2 months earlier.
Additionally, PBGC factors from 1987 to 1993 were adjusted by PBGC to
reflect the same mortality table that was used to determine the factors
after 1993. Also, PBGC publishes two factors, one for the first 20
years to 25 years of a valuation period, and another for the remaining
years. The figure shows factors for the first part of the valuation
period.
PBGC interest rate factors are based on surveys of insurance companies
conducted by the American Council of Life Insurers (ACLI) for PBGC and
IRS.[Footnote 31] The survey asks insurers to provide the net annuity
price for annuity contracts for plan terminations. PBGC develops
interest rate factors, similar to interest rates, from the survey
results, which are adjusted to the end of the year using an average of
the Moody‘s Corporate Bond Indices for Aa and A-rated corporate bonds
for the last 5 trading days of the month. The adjusted interest rate
factors are published in mid-December for use in January. The interest
rate factors are then further adjusted each subsequent month of the
year on the basis of the average of the Moody‘s bond indices. According
to PBGC, the interest rate factors, when used along with the mortality
table specified in PBGC regulations,[Footnote 32] reflect the rate at
which pension sponsors could have settled their liabilities, not
including administrative expenses, in the market for single-premium
nonparticipating group annuities issued by private insurers. Although
PBGC interest rate factors do not consider the insurers‘ administrative
expenses, a May 2000 American Academy of Actuaries study of the PBGC
interest rate factors found that they overstated termination liability
by a relatively small amount, averaging 3 percent to 4
percent.[Footnote 33] The study characterized PBGC factors as mildly
conservative.
Despite its seeming desirability as a statutory rate because of its
direct connection to group annuity purchase rates, PBGC‘s interest rate
factors may be more vulnerable to manipulation than other alternatives
because they are not based on interest rates determined by the credit
market and are less transparent. The identity of insurance companies
surveyed and included in PBGC factors is not known, raising ambiguity
about the extent to which the PBGC interest rate factors reflect the
current broad market for group annuities. Additionally, PBGC
calculations are not reported or independently reviewed. However, an
insurance company representative said that insurance companies
participating in the survey would likely agree to have that
participation reported, and a PBGC official said that PBGC would not
object to an independent review of its methodology for developing the
interest rates.
Alternatives Likely to Decrease Lump-Sum Payments, Employer
Contributions, and PBGC Revenue:
If the alternative results immediately in a higher allowable interest
rate, which is likely for the alternatives we reviewed, using the
higher rate would generally decrease minimum allowable lump-sum
amounts[Footnote 34] and increase the number of participants whose
benefit could potentially be distributed as a lump sum without their
consent, decrease minimum and maximum employer contributions, and
decrease PBGC revenue. The present value of a participant‘s benefit and
related contribution and premium requirements would decrease because a
higher interest rate increases the value of today‘s dollars, relative
to future dollars, and therefore fewer of today‘s dollars should be
needed to pay benefits in the future. However, if the alternative
produces a lower interest rate, plan participants would receive larger
lump sums, employers would need to increase contributions to their
plans, and PBGC may experience an increase in revenue.
The magnitude of these effects on lump sums, plan funding, and PBGC
premiums would depend on the characteristics of the plan and its
participants and how the rate is specified in the law. Additionally, if
the Congress specifies the interest rate differently for current
liability and lump-sum calculations, as is currently the case, the
magnitude of the impact on each could differ. Furthermore, the effect
on current liability and lump-sum calculations could be phased in over
a period of time. In 1994, for example, the law phased in the reduction
in the upper limit on interest rates for current liability calculations
from 110 percent to
105 percent over a 5-year period. Additionally, requiring the use of an
updated mortality table for current liability calculations might
partially offset the effect that a higher interest rate would have on
current liability calculations.[Footnote 35]
During the period from January 1994 to July 2002, the monthly long-term
corporate bond rates, GSE rates, and 30-year interest rate swap rates,
were generally greater than the 30-year Treasury bond rate; the PBGC
estimated rate was below the 30-year Treasury bond rate in the mid-
1990s but was higher than the 30-year Treasury bond rate after 1998. As
shown in figure 5, each rate‘s relationship to the 30-year Treasury
rate has changed over time.
Figure 5: Thirty-Year Treasury Bond Rates and Proposed Alternative
Interest Rates, 1994 to 2002:
[See PDF for image]
[End of figure]
Use of Higher Interest Rates Would Decrease Lump-Sum Amounts:
Figure 6 shows that the effect of a change in the interest rate used to
calculate lump sums is greater for participants further away from
retirement than for participants near retirement. The figure shows, for
example, that a 1-percentage point increase in the interest rate from
5 percent to 6 percent would result in an 8 percent decrease in the
lump sums of participants expected to retire almost immediately. On the
other hand, that same 1-percentage point increase in the interest rate
would result in a 36 percent decrease in the lump sums of participants
expected to retire in 40 years.
Figure 6: Percent Change in Lump Sums for Participants Retiring in 40
Years or Less for an Interest Rate Increase from 5 Percent to 6
Percent:
[See PDF for image]
[End of figure]
Note: GAO and American Academy of Actuaries analysis using the 1994
Group Annuity Reserving table mortality data.
Reducing the dollar amount of each lump-sum distribution by using a
higher interest rate may affect the number of employers that offer a
lump-sum distribution and the number of participants electing to take a
lump-sum distribution. Many employers already offer a lump-sum
provision in their plans; however, if the rate used to calculate lump-
sum distribution amounts were to increase, reducing the amount of each
distribution, more employers may adopt lump-sum provisions in their
plans in order to reduce costs. However, fewer participants might elect
a lump-sum distribution if the value of such payments were to decline
relative to the participant‘s annuity benefit.
Reducing the calculated present value of each participant‘s benefit
would also increase the number of participants whose benefit may be
distributed by the plan as a lump sum without their consent. An
increase in the assumed interest rate would cause the present values of
some benefits, which are currently above the $5,000 limit for
nondiscretionary distribution as a lump sum, to be reduced to the point
that they fall below that limit.
Use of Higher Interest Rates May Decrease Employer Contributions and
PBGC Revenue:
Because a higher interest rate would make plans appear better funded
relative to current liabilities than they were before, employer
contributions and PBGC revenue may decrease. For each 1-percentage
point change in the interest rate, estimated current liabilities of a
pension plan would change by 12 percent to 15 percent.[Footnote 36]
Such a change may lower or eliminate the minimum employer contribution,
referred to as the deficit reduction contribution, required by the
IRC.[Footnote 37] Therefore, plans with a typical distribution of
participants would see their liabilities reduced by
12 percent to 15 percent from a 1-percentage point increase in the
interest rate. Figure 7 shows plans that were 80 percent funded would
become more than 90 percent funded and would no longer have to make a
deficit reduction contribution.
Figure 7: Effect of a 1-Percentage Point Increase in the Interest Rate
on the Funded Percentage of a Hypothetical Plan with a Typical
Participant Distribution:
[See PDF for image]
[End of figure]
Note: At 90-percent funded and above for current liability, the plan is
not subject to the deficit reduction contribution, which is the portion
of the minimum funding requirements that uses the
30-year Treasury rate. A 12-percent reduction in liabilities, resulting
in a 10.9-percent increase in the funded percentage is assumed for
illustrative purposes.
A higher interest rate would also decrease allowable employer
contributions for plans at the full funding limit. The IRC imposes full
funding limitations that limit tax-deductible contributions under
certain circumstances in order to prevent employers from contributing
more to their plan than is necessary to cover promised future benefits.
The full funding limitations established in 1987 and 1994, also known
respectively as the 150-percent current liability limitation[Footnote
38] and the 90-percent current liability limitation, are required to be
computed using the 30-year Treasury rate. If the rate with which they
are required to be computed were to increase, more plans would be
subject to the full funding limitation and, therefore, fewer would be
allowed to make additional contributions.
Employer premium payments to PBGC would decrease with the use of a
higher interest rate because their plans‘ current liabilities would
become better funded. Generally, ERISA requires plans with assets that
are less than the value of their accrued vested benefits to pay an
additional premium, termed the variable-rate premium.[Footnote 39]
Assuming an increase in the interest rate, some plans would no longer
be subject to the variable-rate premium because the reduction in their
current liabilities would cause them to reach the full funding limit
and therefore become exempt from the payment. Plans still subject to
the variable-rate premium would pay less because their current
liabilities would become better funded.
Conclusions:
The choice of an interest rate has important implications for federal
revenue, employer cash flow, and participant retirement income. A
single percentage point increase in the interest rate would reduce a
typical pension plan‘s current liabilities by 12 percent to 15 percent,
depending on participant demographics. Rules for using current
liability calculations to determine minimum contributions, full funding
limits, and PBGC premiums are extremely complex. However, in general,
with an increase in the interest rate, some under-funded plans would
become adequately funded, some plans would reach full funding limits,
and additional plans would avoid variable-rate premiums. Additionally,
the minimum allowable value of the lump-sum equivalent of a
participant‘s annuity benefit would decline. The magnitude of the
decline would depend on the participant‘s age and proximity to the
plan‘s normal retirement age.
Each alternative has characteristics that may make it more or less
appropriate as an interest rate. To the extent that policymakers
continue to want the interest rate tied to group annuity purchase
rates, the PBGC interest rate factors have the most direct connection
to the group annuity market. Other than the survey conducted for PBGC,
no mechanism exists to collect information on actual group annuity
purchase rates. Although the PBGC interest rate factors may track group
annuity purchase rates more closely than other rates do, the PBGC
interest rate factors are less transparent than market-determined
alternatives. Long-term market rates, such as corporate bond indices,
may track changes in group annuity rates over time, but they are less
directly connected to group annuity rates and their proximity to group
annuity rates is uncertain. In addition, an interest rate based on some
long-term market rates, such as corporate bond indices, may need to be
adjusted downward to better reflect the level of group annuity purchase
rates.
Finally, the suitability of any interest rate used is likely to change
over time and, unless some entity is given the responsibility for
monitoring its relationship to group annuity purchase rates, the
Congress and pension plans regulatory agencies will have difficulty
determining when changes are needed. The Congress has made several ad
hoc adjustments to the mandatory interest rate for pension calculations
and can continue to make changes to the rate through the legislative
process. Given the significant technical issues associated with such
decisions as well as the time it takes to enact such a legislative
change, the Congress could decide to delegate this authority to the
executive branch and establish a process to monitor the mandatory rate.
This would provide an opportunity for needed adjustments to the rate to
occur in a timelier manner. We are offering suggestions to the Congress
on a possible process for adjusting the mandatory rate as well as a way
to periodically monitor the rate over time.
Matters for Congressional Consideration:
To improve the timeliness of adjustments to the mandatory interest rate
for pension calculations, the Congress should consider establishing a
process for regulatory adjustments of the rate. The Congress should
consider providing the cognizant regulatory agencies--Labor, Treasury,
and PBGC--the authority under ERISA to jointly adjust the rate within
certain boundaries as specified under the law.
This could be done by the Congress establishing an interagency
committee to adjust, with the input of key stakeholders, including plan
sponsors, labor unions, actuaries and others, the mandatory interest
rate. This could be a transparent process consistent with the
Administrative Procedures Act. Under this option, the Congress could
either require that the Committee‘s adjustments to the mandated
interest rate obtain congressional approval and be enacted into law or
it could provide for congressional review and disapproval. The
disapproval role could be similar to the role the Congress provides for
itself under the Congressional Review Act. Under the act, federal
regulations are held for 60 days to give the Congress the opportunity
to pass a resolution of disapproval. This process provides the
advantages of allowing for more timely adjustments to the interest rate
if needed and providing the Congress with the opportunity to intervene
if it so chooses without requiring direct congressional involvement for
the adjustments to take effect.
Whether the Congress decides to maintain its current role in setting
and adjusting the mandatory interest rate or delegates this authority
to the executive branch, it should consider establishing a process to
better monitor changes to the rate in relation to group annuity
purchase rates. If the Congress selects one of the market-based rates
as the new mandatory rate, it should consider amending ERISA to require
the cognizant regulatory agencies to (1) periodically evaluate the
relationship between the rate and the group annuity purchase rates and
report to the Congress and (2) provide comments about how any changes
to the mandated interest rate they would recommend would likely affect
federal revenue, employer pension contributions, plan funding levels,
and participants‘ lump-sum benefits. This would provide the Congress
and the regulatory agencies an opportunity to respond in a timely
manner to changes that might affect the relationship between the
market-based rate and the group annuity purchase rate.
Alternatively, if the Congress decides to select the PBGC interest rate
factors as the mandatory interest rate, it should consider requiring an
independent review to validate PBGC‘s methodology and calculations for
developing the factors and require PBGC to publish its methodology,
both before they are selected as the mandated interest rate and
periodically thereafter.
Agency Comments:
We provided a draft of this report to Labor, Treasury, and PBGC. The
agencies jointly provided written comments, which appear in appendix
III. They generally agreed with our findings and conclusions and noted
that our report will help interested parties better evaluate possible
alternatives to the 30-year Treasury rate. They also provided technical
comments, which we incorporated as appropriate.
We are sending copies of this report to the Secretary of Labor, the
Secretary of the Treasury, the Secretary of Commerce, and the Executive
Director of the Pension Benefit Guaranty Corporation, appropriate
congressional committees, and other interested parties. We will also
make copies available to others on request. In addition, the report
will be available at no charge on GAO‘s Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at
(202) 512-7215 or George A. Scott at (202) 512-5932. Other major
contributors include Daniel F. Alspaugh, Joseph Applebaum,
Kenneth J. Bombara, Mark M. Glickman, Michael P. Morris,
Corinna Nicolaou, John M. Schaefer, and Roger J. Thomas.
Signed by Barbara D. Bovbjerg:
Barbara D. Bovbjerg
Director, Education, Workforce
and Income Security Issues:
[End of section]
Appendix I: Scope and Methodology:
To determine the characteristics of a suitable interest rate, we
reviewed pension laws and their legislative history with respect to the
calculation of current liability and lump-sum amounts. We also
interviewed officials at the Pension Benefit Guaranty Corporation
(PBGC) and other policymakers who played a role in assessing
alternative interest rates. We obtained information about group annuity
pricing, and the availability of information about group annuity
purchase rates, from representatives of the American Academy of
Actuaries, the American Council of Life Insurers, the National
Association of Insurance Commissioners, and insurance companies.
To identify and examine the advantages and disadvantages of potential
alternative interest rates, we interviewed representatives and reviewed
documents from a number of government, pension plan sponsor, and
investment entities, including PBGC, the Department of the Treasury,
and Department of Labor. We also compared rates and other market
statistics for suggested alternative debt securities with rates for 30-
year Treasury bonds from 1987 to 2002. We discussed transparency, rate
construction, and liquidity issues for the alternatives with economists
at the Department of the Treasury and the Federal Reserve and with
financial experts at the Bond Market Association, Federal National
Mortgage Association, and pension plan consultants.
To determine how alternative rates might affect employers, plan
participants, and PBGC, we created hypothetical examples in which we
tested the effect of changes in rate levels on current liabilities and
lump-sum payments. We designed the hypothetical examples based on
discussions with several actuaries and pension consultants, including
PBGC and the American Society of Pension Actuaries. Additionally, in
order to better understand the possible effects of a rate change on
employers and plan participants, we spoke with several organizations
that represent their interests. In order to better understand the
implications of a change in the interest rate on PBGC, we spoke with
PBGC, Department of Labor, Internal Revenue Service, and the Department
of the Treasury.
[End of section]
Appendix II: Group Annuity Purchase Rate Would Be Affected by Cash Flow
Projection and Yield Curve at Termination:
Group annuity purchase rates would vary among plans depending on the
pattern of each plan‘s projected cash flows over time and the yield
curve at the time the plan is terminated.
Cash Flows Vary by Plan:
Figure 8 shows the projected cash flow over a 40-year period for a
sample plan at termination. The figure shows that, in the early years,
payments to inactive participants of the sample plan, primarily current
retirees, constitute a majority of total cash flow. In later years,
however, payments to active participants make up the majority of total
cash flow as current employees retire.
Figure 8: Projected Cash Flow for Sample Defined Benefit Plan for the
First 40 Years after Plan Termination:
[See PDF for image]
[End of figure]
Note: Inactive participants are primarily current retirees, but also
includes some terminated-vested participants.
All else being equal, the projected cash flows of plans with a larger
percentage of retirees at termination than the sample plan would be
more heavily weighted toward the early years, and the cash flows of
plans with a larger percentage of active participants at termination
would be more heavily weighted toward the later years.
Group Annuity Purchase Rates Would Vary with the Yield Curve:
Surveys of insurance company group annuity pricing practices performed
as part of two studies for the Society of Actuaries indicate that
insurance companies use different methods to price group annuity
products.[Footnote 40] In general, these methods may be described with
respect to yield curves, which may be constructed for various types of
securities, including Treasury securities, corporate bonds, and
mortgages. Figure 9 shows, for example, two of the better know yield
curves, the yield curves for on-the-run Treasury securities and zero-
coupon Treasury securities, as of February 6, 2003.[Footnote 41] The
yield for on-the-run securities reflects interest rates for securities
that make semiannual interest payments before they mature, followed by
a final payment of interest and principal at maturity. The yield for
zero-coupon securities reflects interest rates, called spot rates, for
securities that make a single payment at maturity.
Figure 9: Yield Curves for On-the-Run and Zero-Coupon Treasury
Securities as of February 6, 2003:
[See PDF for image]
[End of figure]
Note: Treasury constructed the curve for zero-coupon securities, often
referred to as Separate Trading of Registered Interest and Principal of
Securities (STRIPS), from the yield on on-the-run securities. According
to a Treasury official, spot rates constructed from the yield for on-
the-run securities may differ from actual market rates on STRIPS.
In figure 9, interest rates for the on-the-run securities that make
coupon payments are lower than rates for zero-coupon securities, at the
same maturity. This reflects the fact that coupon yields are a blend of
zero-coupon spot rates, and the term structure of spot rates on
February 6, 2003, was upward sloping.[Footnote 42]
To determine the present value of plan cash flows using a zero-coupon
yield curve, the spot rates at various maturities may be used as the
interest rates for calculating the present value of cash flows at the
corresponding points in time.[Footnote 43] For example, the spot rate
at a 10-year maturity might be used to calculate the present value of a
cash flow at 10 years because the timing of the single payment from the
security would match the timing of the cash flow by the plan.
In using a yield curve based on securities that make payments prior to
maturity, maturity is inadequate for deciding which interest rate
should be used to calculate the present value of a given cash flow
because the security‘s interim interest payments must be considered. In
these cases, a concept called ’duration“ may be used to select a single
interest rate for all cash flows in the present value calculation.
Duration measures the average time that it takes for a security to make
all interest and principal payments, or a pension plan to make all
benefit payments, with the time until each payment weighted by its
present value as a percentage of the total present value of all
payments. The total present value of a security‘s payments is its
market price and the total present value of a plan‘s benefit payments
is its current liabilities. An interest rate is selected for plan
present value calculations from the yield curve that results in the
same duration for the security and plan‘s cash flow.
Duration is a measure of the sensitivity of a security‘s price, a lump
sum, or a pension plan‘s current liability to changes in the interest
rates used to calculate them. For example, actuaries estimate that the
duration of the liabilities for pension plans with a ’typical“
distribution of participants is between 12 years and 15 years.[Footnote
44] Durations of 12 years and 15 years indicate that a 1-percentage
point increase in the interest rate used to calculate a plan‘s
liabilities would decrease those liabilities by roughly 12 percent and
15 percent, respectively. In February 2003, the duration of the 30-year
Treasury bond issued in February 2001 was about 15 years.
[End of section]
Appendix III: Comments from the Department of Treasury:
UNDER SECRETARY:
DEPARTMENT OF THE TREASURY WASHINGTON, D.C.
February 21, 2003:
Ms. Barbara D. Bovbjerg Director:
Education, Workforce, and Income Security Issues United States General
Accounting Office Washington, DC 20548:
Dear Ms. Bovbjerg:
Thank you for sharing a draft copy of Private Pensions. Process Needed
to Monitor the Mandatecl Interest Role for Pension Calculations with
the Departments of Treasury. Labor and Commerce and the Pension Benefit
Guaranty Corporation. On behalf of these agencies, Treasury staff
earlier provided GAO staff with technical comments on the draft report.
As you know, some propose replacing the 30-Year Treasury interest rate
with a pension discount rate that is a composite of long term corporate
interest indexes. We are concerned that this approach, or any other
single interest rate, ignores the time structure of benefit payments
that make up pension liabilities. In particular, using a long-term
interest rate to discount expected benefit payments for a pension plan
whose participants are either retired or nearing the end of their
working lives is likely to understate the plan‘s liabilities since a
substantial portion of total benefit payments are due in the near
future.
Likewise using a short-term interest rate to discount the liabilities
of a plan whose participants are predominantly in their twenties and
thirties will tend to overstate liabilities because most of these
workers will not begin to receive pension benefit payments for twenty
years or more. The Administration currently is evaluating different
methods of computing pension liabilities that could reflect the
underlying time structure of pension plan liabilities.
We are pleased to see that an appendix to the report describes the
concept of matching discount rates to the time structure of pension
liabilities. Our research indicates that the concept is consistent with
the best and prudent pricing and design practices of financial
intermediaries, including the issuers of annuity products. Your review
of the concept in the report will help all interested parties better
evaluate possible replacements for the 30-Year Treasury rate.
Again, the agencies appreciate the opportunity to review the draft
report.
Signed by Peter R. Fisher:
Peter R. Fisher:
Under Secretary for Domestic Finance:
FOOTNOTES
[1] Under defined benefit plans, formulas set by the employer determine
employee benefits. Defined benefit plan formulas vary widely, but
benefits are frequently based on participant pay and years of
employment. Because defined benefit plans promise to make payments in
the future, employers must use present value calculations to estimate
the current value of promised benefits. Present value calculations
reflect the time value of money--that a dollar in the future is worth
less than a dollar today, because the dollar today can be invested and
earn interest. The calculation requires an assumption about the
interest rate, which reflects how much could be earned from investing
today‘s dollars.
[2] PBGC is a federal corporation created by ERISA to insure pension
benefits, up to certain limits set by law, of participants in most
qualified defined benefit pension plans. PBGC takes over defined
benefit plans that are terminated with insufficient assets to pay the
benefits to which participants are entitled.
[3] Generally, defined benefit plan participants receive benefits in
periodic payments, called ’annuities,“ starting at retirement and
ending at the beneficiary‘s death. However, under certain
circumstances, defined benefit plans may provide all promised benefits
in a single lump-sum payment.
[4] In 1987, a permissible range meant a rate of interest that was not
more than 10 percent above, and not more than 10 percent below, the
weighted average of the rates of interest on 30-year Treasury bond
securities during the 4-year period ending on the last day before the
beginning of the plan year. The weighted average rate is calculated as
the average yield over 48 months with rates for the most recent 12
months weighted by 4, the second most recent 12 months weighted by 3,
the third most recent 12 months weighted by 2, and the fourth weighted
by 1. The top of the permissible range was gradually reduced by 1
percent per year beginning with the 1995 plan year to not more than 5
percent above the weighted average rate effective for plan years
beginning in 1999. The top of the permissible range was temporarily
increased to 20 percent above the weighted average rate for 2002 and
2003. A plan‘s total liability is calculated for benefits earned
through the valuation date.
[5] Under the special minimum funding rule, a single-employer plan
sponsored by an employer with more than 100 employees in defined
benefit plans is subject to a deficit reduction contribution for a plan
year if the value of the plan‘s assets is less than 90 percent of its
current liability. However, a plan is not subject to the deficit
reduction contribution if (1) the value of plan assets is at least 80
percent of current liability and (2) the value of the plan assets was
at least 90 percent of current liability for each of the 2 immediately
preceding years or each of the second and third immediately preceding
years. See 26 U.S.C. 412(l).
[6] The full funding limit is generally defined as the excess, if any,
of (1) the lesser of (a) the accrued liability under the plan,
including normal cost, or (b) 170 percent of the plan‘s current
liability, over the value of the plan‘s assets. Additionally, the full-
funding limit is never below the excess, if any, of 90 percent of a
plan‘s current liability over the value of the plan‘s assets. See 26
U.S.C. 404(a)(1) and 26 U.S.C. 412(c)(7). Current and accrued liability
differ in that current liability is limited to benefits that
participants and beneficiaries have accrued to date, while accrued
liability is generally based on projected benefits. This current
liability full-funding limit was originally 150 percent of current
liability but started being phased out in 1999. It will be repealed for
plan years beginning in 2004 and thereafter. Even if a plan‘s assets
are at the full-funding limit, the employer can contribute and deduct
the amount, if any, to bring assets up to 100 percent of current
liability.
[7] An additional premium is required if the plan has unfunded vested
benefits using a statutorily specified interest rate.
[8] Under IRC, if a participant ceases to be employed by the employer
maintaining the plan, the plan may distribute the participant‘s benefit
as a lump sum without the consent of the participant, if the present
value of the benefit does not exceed a specified amount (currently
$5,000). Internal Revenue Service regulations provide plans with
various options for specifying the 30-year Treasury bond interest rate
to be used under the plan, such as the period for which the interest
rate will remain constant and the use of averaging.
[9] For example, by placing limits on the range of rates that employers
might use as an interest rate for calculating current liabilities, the
Congress effectively prevented employers from choosing a rate that
reflects insurance company prices should it result in an interest rate
outside the permissible range.
[10] The Job Creation and Worker Assistance Act of 2002 expanded the
permissible range of the statutory interest rate for current liability
calculations for plan years beginning after December 31, 2001, and
before January 1, 2004. Similarly, the act increased the statutory
interest rate for PBGC variable-rate premium calculations for plan
years beginning during the same time period. See section 405 of P.L.
107-147, Mar. 9, 2002.
[11] Other important assumptions in estimating the value of plan
benefits include the mortality and retirement rates for plan
participants because those rates determine the expectation that each
future benefit payment will be made and the expected starting date of
benefit payments, respectively.
[12] Recently, a number of issues have been raised concerning the
interest rate that should be used for measuring pension liabilities.
See, for example, Lawrence N. Bader and Jeremy Gold, Reinventing
Pension Actuarial Science, The Pension Forum, Society of Actuaries,
(Schaumberg, IL, forthcoming) at http://www.soa.org/sections/
reinventing_pension.pdf.
[13] Selection of Economic Assumptions for Measuring Pension
Obligations, Actuarial Standard of Practice Number 27, Actuarial
Standards Board, Dec. 1996.
[14] Employers are generally subject to an excise tax for failure to
make required contributions or for making contributions in excess of
the greater of the maximum deductible amount or the ERISA full-funding
limit.
[15] Accrued benefits are benefits that plan participants have earned
based on past service. Accrued benefits may be vested, in which case
plan participants have a nonforfeitable right to them, or nonvested, in
which case participants have not yet completed qualification
requirements for the benefits. In a voluntary plan termination,
participants become fully vested in their accrued benefits.
[16] Section 9307(e)(1)(5)(B)(iii)(II) of P.L. 100-203, Dec. 22, 1987.
[17] Omnibus Budget Reconciliation Act of 1987, Conference Report to
Accompany H.R. 3545, House of Representatives Report 100-495 at 846 and
868, Dec. 21, 1987.
[18] The amendment phased in the change in the upper limit to 105
percent over several years.
[19] Retirement Protection Act of 1994, House Report No. 103-632(II),
Aug. 26, 1994.
[20] The maximum lump sum cannot exceed the present value of the
maximum annual benefit permitted by IRC (for a participant retiring at
age 65 in 2003, the lesser of $160,000 a year or 100 percent of the
participant‘s average compensation for the high 3 years).
[21] In addition to changing the required interest rate to 30-year
Treasury bond rates, the amendment required employers to use a
mortality table based on the prevailing commissioners standard table
used to determine reserves for group annuity contracts. See Section No.
767, P.L. 103-465, Dec. 08, 1994, and H.R. Rep. No. 632(II), Aug. 26,
1994.
[22] Insurance companies may be able to achieve a somewhat higher rate
of return than indicated by publicly traded securities, at a given
credit risk, by lending money privately and holding investments to
maturity.
[23] Projected cash flows are the expected payments to retired and
nonretired participants taking into account their expected mortality
and adjusted for the expected commencement dates for nonretired
participants. A yield curve shows how current interest rates vary with
the term to maturity of securities that would be used to finance the
cash flow.
[24] According to a survey of insurance companies for a Society of
Actuaries research project, all companies adjusted their mortality by
projection to the current date, and most companies projected future
improvement. Surveys indicate that insurance companies use several
mortality tables, including the 1994 Group Annuity Reserving and 1994
Group Annuity Mortality tables. See Victor Modugno, ’30-Year Treasury
Rates and Defined Benefit Plans,“ in 30-Year Treasury Rates and Defined
Benefit Plans, a special report commissioned by the Society of
Actuaries (2001), www.soa.org/sections/pension_research.html
(downloaded Dec. 12, 2002), 3. See also Ryan Labs, Inc., ’Pension
Financial Management and Valuation Discount Rates,“ in 30-Year Treasury
Rates and Defined Benefit Plans, a special report commissioned by the
Society of Actuaries (2001), www.soa.org/sections/
pension_research.html (downloaded Dec. 12, 2002), 27.
[25] Insurance company actuaries said that variations in plan
provisions and insurance company assumptions with respect to early
retirement and ancillary benefits may preclude an accurate
determination of actual group annuity purchase rates, even if the buy-
out price and basic plan information were disclosed. They also said,
however, that a periodic survey of insurance company assumptions could
be useful in assessing the designated interest rate.
[26] A basis point is one-hundredth of a percent.
[27] Jon Parks and Ron Gebhardtsbauer, Alternatives to the 30-Year
Treasury Rate, a public statement by the Pension Practice Council of
the American Academy of Actuaries (July 27, 2002), www.actuary.org/pdf/
pension/rate_17july02.pdf (downloaded Dec. 12, 2002), 8.
[28] Credit risk is the potential that borrowers will be delinquent or
default on their obligations.
[29] Companies that issue debt typically have a ’credit rating“ based
on an assessment of its probability of making promised payments. A
number of companies, including Moody‘s and Standard & Poor‘s, issue
widely accepted credit ratings of different companies.
[30] The study used the 30-year Bloomberg A3 index of industrial bonds
for the analysis. See Victor Modugno, 30-Year Treasury Rates, 6.
According to the American Academy of Actuaries, the Bloomberg A3 index
rate is close to the rate for Moody‘s Aa-rated bonds because it is
option adjusted. For example, the rates are adjusted to eliminate the
call provision. See Parks and Gebhardtsbauer, Alternatives, 4.
[31] ACLI conducts four surveys annually. PBGC interest rate factors
are based on an average of the surveys conducted in June and September.
[32] 29 C.F.R. 4044.53 specifies the use of the 1983 Group Annuity
Mortality Table for PBGC valuations of current liability, which under
current rules is the same table specified by the IRS for current
liability calculations. However, IRS has initiated the process to
change the table. See IRS Announcement 2000-7, which was published
February 7, 2000. An IRS actuary said that the effort is still in
process with no estimated completion date. According to PBGC, changing
the mortality table on which the factors are based would alter them. An
official said, for example, that basing the factors on the mortality
table that PBGC used in preparing its 2002 financial report would
change them by 60 basis points.
[33] Marilyn M. Oliver and Gregory S. Schlappich, PBGC Plan Termination
Cost Study, American Academy of Actuaries, May 4, 2000.The study
examined actual plan terminations, which mostly occurred between 1994
and 1997. Available data did not cover very large plan terminations and
the study cautioned that no conclusions should be drawn with respect to
them.
[34] A change to a higher statutory interest rate would not decrease
minimum lump-sum amounts for participants in plans that use an interest
rate below the rate on 30-year Treasury bonds for calculating lump-sum
amounts.
[35] More recent mortality tables take into consideration increased
expected longevity due to advances in medical diagnostics and treatment
and therefore have the effect of increasing current liability
valuations because the valuation will have to be made with the
assumption that the promised monthly benefit will be paid over a longer
period of time.
[36] This assumes a typical distribution of participants by age and
other relevant factors, such as number of years until retirement and
years of service. See Parks and Gebhardtsbauer, Alternatives, 6. The
magnitude of an increase or decrease in plan liabilities associated
with a given change in discount rates would depend on the demographic
and other characteristics of each plan. Essentially, the percentage
change in liabilities, for a given change in the discount rate, would
be greater for plans and plan participants with a majority of their
benefit payments in the distant future (younger participants far from
retirement) than for those plans with a majority of their payments in
the near term (older participants close to or already in retirement).
[37] The IRC requires that plans with a funded percentage below 90
percent be subject to the deficit reduction contribution. However,
plans that are between 80 percent and 90 percent funded are exempted
from the deficit reduction contribution as long as the funded
percentage in 2 consecutive years out of the prior 3 years were at or
above 90 percent.
[38] The current liability full-funding limit established in 1987 was
originally 150 percent of current liability but started being phased
out in 1999. It will be repealed for plan years beginning in 2004 and
thereafter.
[39] Variable-rate premiums are calculated on the basis of a plan‘s
unfunded current liabilities, taking into account only vested benefits
discounted using 100 percent of the 30-year Treasury rate for the month
preceding the beginning of the premium payment year. Under the Job
Creation and Worker Assistance Act of 2002, the percentage of the 30-
year Treasury rate for variable-rate premium calculation purposes was
temporarily increased from
85 percent to 100 percent for plan years beginning in 2002 and 2003. In
2004, under current law, it will revert to its former 85 percent of the
30-year Treasury rate until such time as the Secretary of the Treasury
specifies a new mortality table for calculating current liabilities at
which time it is scheduled to go back up to 100 percent of the 30-year
rate.
[40] Modugno, 30-Year Treasury Rates, 4-7. Ryan Labs, Inc., 30-Year
Treasury Rates, 37-38.
[41] On-the-run securities are the most recently issued government
securities at each maturity point.
[42] Bruce Tuckman, Fixed Income Securities: Tools for Today‘s Market,
John Wiley & Sons, Inc., (New York, 1995).
[43] Spot rates may need to be converted from semiannual compounded
rates, the convention used in U.S. fixed-income markets, to annual
rates, the convention used by actuaries to specify interest rates for
employee benefit plan liabilities.
[44] Treasury officials believe that the maturity structure of many
large plans is shorter than what has been described by other actuaries
as typical, and that, moreover, for all plans, the maturity structure
has become shorter over the last two decades.
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