Insights

Continued low interest rates have put pressure on organizations that are having a difficult time covering their minimum pension liability payments for their defined benefit plans because of the inverse relationship between interest rates and the pension liability. Currently, the discount interest rate used to calculate funding obligations is based on the average rate of the preceding two years.

In an attempt to alleviate some of the pressure on organizations to fund these liabilities and to attempt to reduce the volatility of the interest rates used in the minimum funding requirement, the Senate passed a federal highway bill called the Moving Ahead for Progress in the 21st Century Act, which contains new rules that will change the way the interest rate is calculated. Beginning in 2012, the interest rate will be calculated using the average rate of the preceding 25 years as long as the new rate is within 10% of the two-year rate (known as the corridor). This will lessen the impact of significant increases and decreases in the interest rate. This new law should reduce minimum payment obligations in the short term. Also included in the bill was an increase in the premiums paid to the PBGC.

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