NU Online News Service, Feb. 28, 6:33 p.m. – Officials at the U.S. General Accounting Office say Congress could consider letting the executive branch adjust the mandatory interest rate used in defined-benefit pension plan calculations.
Congress could continue to adjust the mandatory rate itself, but putting a federal agency in charge "would provide an opportunity for needed adjustments to the rate to occur in a timelier manner," according to Barbara Bovbjerg, the GAO director who led the team that studied the issue.
Setting the right mandatory rate is important, because an unrealistically low rate would sharply increase the cost of funding defined-benefit pensions, and an unrealistically high rate could encourage employers to skimp on contributions, according to pension experts.
"For each 1-percentage point change in the interest rate, estimated current liabilities of a pension plan would change by 12% to 15%," Bovbjerg writes.
If, Bovbjerg says, the mandatory rate increased to 6%, from 5%, a pension plan that seems to have 80% of the assets it needs today would suddenly have a funded percentage of 90.9%.
If the plan had a funded percentage of only 80%, the employer would have to make a contribution to increase the funded percentage. But, if the funded percentage jumped to 90.9%, the employer would not have to make a contribution, Bovbjerg writes.
The federal government also asks employers to use a similar mandatory interest rate in computations of the current lump-sum value of plan participants' benefits.
For a participant retiring in one year, increasing the mandatory rate to 6%, from 5%, would reduce the lump-sum value less than 10%, but the lump-sum value would fall 36% for a participant expected to retire in 40 years, Bovbjerg writes.
