More conservative discount rates would hurt multiemployer pension system, Congress told

Using more conservative interest rates to value multiemployer pension liabilities could put the whole multiemployer system at risk, the National Coordinating Committee for Multiemployer Plans told members of a special joint select committee in a letter.

Some members of the congressional Joint Select Committee on Solvency of Multiemployer Pension Plans have raised the possibility of using more conservative discount rates to forestall having more distressed plans in the future, so the NCCMP had Horizon Actuarial Services LLC model the potential impact on the entire multiemployer system and had Segal Consulting do the same for a representative sampling of their multiemployer clients.

The Horizon analysis found that changing discount rates would cause a dramatic increase in required contributions and volatility, while basing discount rates on corporate bond yields would cause the percentage of well-funded "green zone" plans to drop to 7% from 60%.

In a study released with the letter, Segal Consulting found that using a 3.7% discount rate as a proxy for the current two-year corporate bond yield would require one plan to more than double its contribution rate to avoid a funding deficiency. For a second plan, contributions would jump to $400 million from $40 million over the next three years to avoid a funding deficiency.

For a portfolio with a 50/50 S&P 500/bond index asset allocation, Segal Consulting said annual rolling 30-year returns have never gone below 6.7%, and the average return for the five most recent 30-year periods was 9.1%. Segal officials recommended against considerably lower discount rates, which would expand the current pension crisis from about 10% of multiemployer plans to every multiemployer plan, they said.

Changing discount rates to the 30-year Treasury rate or rates based on bond yields used by single-employer plans, as some members of the joint select committee have proposed, would force most healthy plans "to take immediate and drastic action to correct a new problem that would only be created" by such legislation, NCCMP executive director Michael Scott said the letter Friday to the joint select committee.