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Pension discount rates in steep decline for 1993.

Assumed discount rates for defined-benefit pension plans declined sharply in 1993, apparently in response to (1) an across-the-board interest rate decline and (2) a statement by Securities and Exchange Commission Chief Accountant Walter Schuetze that public companies should use discount rates that reflect current market rates. To illustrate the extent of the 1993 interest rate decline, 10-year U.S. Treasury notes began the year yielding 6.6% and ended it yielding 5.77%.

A survey by Buck Consultants of 68 major corporations' pension disclosure assumptions found that 90% reduced pension discount rates in 1993 to an average 7.36% from 8.34%. The remaining 10% that did not reduce discount rates already had been using a low average rate of 7.19%. Since reduced discount rates increase companies' pension fund liabilities, any turnaround in market interest rates this year will be good news for many pension fund managers.

Melvin R. Harris, CPA, a partner of Thomas Havey & Co., Washington, D.C., agreed the recent decline in average pension discount rates had brought them closer to market rates. However, he questioned whether they would approach market rates anytime soon. He noted, "Many plans have long-term investments with much higher yields than those currently available. As long as plans continue to hold them, the plans' earning power and its assumed discount rate should be higher than prevailing market rates."
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:May 1, 1994
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