(June 25, 2012) — The former director of the Pension Benefit Guaranty Corporation (PBGC) has urged Congress to change the rules used by corporate pensions to calculate liabilities, echoing calls from public figures across the Atlantic last week.
Charles Millard, who helmed the PBGC from 2007 to 2009, issued the plea in a column published in the Wall Street Journal. Last week, Great Britain’s pension minister, Steve Webb, spoke on similar grounds, arguing that ever-lower interest rates were squeezing pension funds and that the British government should tweak regulations to give plans some breathing room.
“The way that liabilities are measured on balance sheets has massive real implications and I have come to the conclusion … that governments cannot stand idly by whilst accountancy standards change which potentially cause massive real economic impacts,” Webb said on June 21 at a conference held by the National Association of Pension Funds.
In the United States, the pressure on pension plans is much the same. In front of Congress is a proposed change that would allow corporate pension plans to employ a longer-term, “smoothed” interest rate when they calculate their liabilities, permitting them to set aside less money for their beneficiaries in the short term. The 2006 Pension Protection Act, Millard asserts, passed in the aftermath of the dissolution of Bethlehem Steel, went too far to ensure that corporate pension plans were well funded. Instead of the currently mandated funded level of roughly 100%, Congress should let pension plans return to a level of about 80%, what Millard calls a sufficient level for healthy corporations.
“This change recognizes that the best environment for corporations to be able to maintain their pensions is one that avoids undue volatility and recognizes that pensions last for decades,” writes Millard, now managing director of pension relations at Citigroup and former columnist of aiCIO. “There is no need for a pension to be fully funded until it is in payout status… Moreover, smoothing will mean that, when times are better and interest rates rise, companies will not be able to avoid contributions. Imagine that interest rates rose two full points. Many American pensions would then appear fully funded. Would we want sponsors to stop contributing?”
To sweeten the deal, Millard adds that such a change would also lessen the tax deductions of corporations, increasing tax revenue and lowering the deficit. Congress “could, and should, give corporate pensions needed relief,” he concludes.
Earlier this month, Danish and Swedish regulators allowed their countries’ pension funds to alter the discount rate that they apply to calculate benefit obligations. Nordic pension funds have suffered greatly, buffeted on both sides by Europe’s sickly market performance and by near-zero interest rates caused by the influx of capital from safety-seeking investors. The regulatory shift caused a jump in the yield of Danish and Swedish long-duration debt, as the appetite of those countries’ pension funds for fixed income declined.
To read Millard’s article, click here. See also: Millard in further detail on discount rates.