by Alvin D. Lurie

A Stitch Barely In Time

After wrangling for months – extending back before year-end 2003 – between the White House and the Congress, and between the Senate and the House, and even within the Democratic ranks in both houses, the Pension Funding Equity Act of 2004 (H.R 3108) was passed and sent to the President on April 8, signed by him on April 10 (a Saturday), made operable by the Treasury on April 12 by issuance of the requisite interest rates for calculating current pension liabilities and resultant funding requirements, and cranked into the determination of pension contributions required by many single employer plans April 15, barely 48 hours later! If you weren’t one of the companies faced with this impossible scenario of having to make a required quarterly pension contribution by that date and not knowing how to satisfy that requirement, at cost of a hefty penalty for noncompliance, you simply would not believe that things had come to such a pass. Is that any way to run a railroad? It makes one wonder whether the second term of Churchill’s famous aphorism about democracy was too generous: (1) Democracy is the worst form of government, (2) Except compared to everything else.

Unless you have been out of the planet for the past year and a half, you know that when the Treasury dropped the issuance of 30-year bonds, which has been the benchmark for calculating pension plan liabilities, it created quite a stir among actuaries and others whose business it is to provide plan sponsors with the minimum and recommended amounts to keep their plans properly funded, not just as a matter of sound actuarial practice but also to satisfy the unforgiving dictates of the minimum funding standards. A temporary fix a couple of years ago has permitted continued use of the 30-year Treasuries, the outstanding float of which provided a market rate for calculating the requisite numbers; but that was not a happy choice, as the vanishing quantity of such issues drove their market values higher, with corresponding shrinkage in their interest yields. Lower interest yields translated into higher required pension contributions geared to such yields.

Combine that with the severe depression in market values generally in recent years (2003 excepted), and you had what the in-crowd knowingly called "the perfect storm", because that double whammy put enormous pressure on plan sponsors – some of the largest, no less than the smallest – to suspend plan contributions or face bankruptcy. Everyone in Washington knew this. That’s what makes this 11^th-hour-and-59-minutes rescue so incredible. There were, to be sure, competing interests at play, each with important constituencies that exerted maximum pressure on ready-to-please Congressmen – in other words, politics as usual. But this issue of pension funding transcended politics-as-usual, reaching deeply into the financing of defined benefit plans, and, by extension, into the pension security of millions of participants – perhaps more so than all the retirement legislation proposed or enacted in the past decade.

So much for this short history of the issue. Where are we now? The answer lies in Notice 2004-34, which the Service characterizes as providing "guidance as to the determination of the weighted average interest rate and the resulting permissible range of interest rates used to calculate liability for the purpose of the additional finding requirements under §412(l) [the rules for charges to the funding standard accounts of single-employer plans] and the minimum full funding limitation of §412(c)(7)(E) [which establishes the allowable minimum relation of current liabilities to plan assets]".

But "guidance" only for the initiate. The notice, while reading like a ride in a canoe on a placid lake for actuaries, is like rafting on a choppy river for most of the rest of us. First, it replaces the 30-year Treasury rate with a long term investment-grade (AA and AAA) corporate bond rate for the 4-year period preceding the plan year. But that corporate rate is a blended rate dependent upon a designated bond index (actually 2 or more indices designated by the Treasury), the "composite corporate bond rate" (hereafter "composite") and the "corporate weighted average interest rate" (hereafter "weighted rate").

In as few intelligible words as is possible, the composite is a monthly rate determined for each of the indices based on the average daily yields to maturity for the bonds included in the index, and then averaged for the indices. The weighted rate for any month is based on the rates for the preceding 48 months, with a weight of 4 for the preceding 12 months, a weight of 3 for the preceding months 13–24, etc. Finally, a permissible range between 90% and 100% of the weighted average is authorized by the new statute, at the election of plan sponsors..

The Notice then sets forth a series of interest rates to be used. For example, the composite corporate bond rate for March 2004 is 5.44, almost the lowest rate during the 4 1/4 years set forth, while the corporate bond weighted average interest rate for the same month was 6.40, with a permissible range for that month of 5.76 to 6.40. The Notice points out that this is intended as "interim guidance", but taxpayers can rely on it until "further guidance" that will be applicable only to plan years beginning after such later announcement.

An accompanying press release quotes the Treasury Assistant Secretary as recognizing that "the new interest rate provides a more appropriate measurement of pension liabilities", but that we must "continue to work toward comprehensive pension funding reform." I suppose that’s good, but I can’t help remembering, as one sage once said, we are all at risk as long as Congress is in session. (He didn’t say anything about Treasury.)

It is all well and good to promise "comprehensive funding reform" -- and the new act contains a section of noble sentiments expressing the "sense of the Congress" to work towards the goals of reduced "volatility" and increased "predictability" in pension funding -- but the act says nothing about the immediate problem that faced plan sponsors in meeting the impossible deadline of April 15th for making quarterly plan contributions as required by Code section 412(m), failing which liability was incurred for steep additional interest charges to their plans' funding standard account. I must confess that I do not know how actuaries were able to absorb the complicated funding rules of the new law, apply the above Treasury guidance for determining the applicable composite and weighted average corporate bond funding rates, and complete the specific calculations for their many clients, and how sponsors were able to cut the checks and make the required contributions, in the 48-hour window between publication of the rates on April 12th and payment of the contributions on April 15th.

Surely there were many missed and miscalculated contributions, directly attributable to the politicking and posturing of the funding issue from Capitol Hill to 1600 Pennsylvania Avenue and back again. Nothing in the new act provides relief for the plan sponsors caught in this Washington game from the unforgiving language of 412(m). Treasury doubtless does not have the authority to grant amnesty. The Congress that caused the problem must provide the relief.