Updated with correction
The Treasury Department on Thursday issued pension funding rates that will allow sponsors of corporate defined benefit plans to reduce their pension contributions by as much as 20%.
The new rates were dictated by provisions in the highway reauthorization bill signed on July 6 by President Barack Obama that removes the requirement to use two-year average of corporate bond rates for calculating liabilities and annual pension funding obligations.
The new law lets plan sponsors use a 25-year historic average of the corporate bond rates within a 10% range; the higher the rate, the lower the liability and the cash contribution needed.
“It can make a real difference to a lot of companies,” said Lynn Dudley, senior vice president for policy at the American Benefits Council, in an interview. “It's timely and it slows down their contributions so they can stabilize.”
The new Treasury segment rates of 6.15%, 7.61% and 8.35% mean that an average effective rate of 5.3% will now average 7.37%, depending on which of three time periods, or segments, a plan sponsor uses. Companies can choose to use the new rates for their current fiscal year calculations, but will be required to do so for plan years beginning on or after Jan. 1, 2013.
Further guidance will be needed for DB plans that aren't 80% funded or that offer lump-sum payments, but plan sponsors can at least start calculating new contributions, said Judy Miller, chief of actuarial issues and director of retirement policy for the American Society of Pension Professionals & Actuaries. “Many plans won't be able to make final decisions, but people are very pleased that the rates are out and they can now get a much better sense to figure out where they stand.”