The U.S. House of Representatives has not included pension funding relief in its version of the highway bill, as the U.S. Senate has done in its version.
The House should examine the Senate funding relief provisions and consider agreeing to include them, or some variation of them, in whatever final highway bill emerges from the coming negotiations between the two branches of Congress.
As reported in Pensions & Investments March 19, the Senate funding relief provision would allow plan sponsors to calculate contributions with interest rates averaged over 25 years, with some restrictions. At present, discount rates are based on a two-year average of bond index rates.
The Senate provision would provide some relief to companies dealing with unusually low interest rates as they try to keep their defined benefit pension funds adequately funded. As mentioned in the above editorial, declining interest rates have left corporate defined benefit plans more underfunded in aggregate at the end of 2011 than they were a year before, despite substantial corporate contributions.
As big a problem as low interest rates for many corporations is the volatility of the rates. Between 2010 and 2011 the rate companies used for calculating the present value of the liabilities declined by 66 basis points, boosting the size of the liabilities and hence the size of the needed contributions. Volatility in contribution levels hinders companies' ability to plan investments.
If House members can't accept the Senate's 25-year average, perhaps they could accept a 10-year average, which would still reduce volatility substantially without raising the discount rate significantly.
But if the House and Senate cannot agree to include some funding relief in the final highway bill — a possibility since pension funding is not germane to highway funding — then the two should agree to revisit the issue as a separate bill.
Companies need relief from the burden created by the Fed's policies, at least from the volatility.
