As anyone knows that follows this blog, the Butch Lewis Act has passed through the House and currently resides in the Senate. The backbone of this legislation is a government loan program that provides low-interest rate loans provided by a government agency within the Treasury. When the legislation was first contemplated the loan interest rate, which is set at 25 basis points above the prevailing 30-year Treasury Bond was going to be roughly 3.25%-3.5%.
This morning the U.S. 30-year Treasury Bond’s yield is an incredible 2.14%. If ever there was a time for these troubled funds to get a lifeline it is now. The roughly 1% savings on the interest rate further improves the likelihood that these loans get repaid in 30 years, while further reducing the needed annual return, which has been only 6.5%, to fund the interest payment, balloon payment, and future benefits.
Perhaps our friends at Cheiron could run a quick and dirty analysis to depict how this incredible move in rates would further aid our struggling multiemployer plans. I implore the U.S. Senate to stop dawdling and get to work passing this important legislation so that we can begin to heal these critically important plans at a likely deep discount to what was originally contemplated.
“only 6.5%”, Central States average weighted return was 4.9% from 2000 to 2014. Vanguard Group has predicted annualized return of 5% for the next 5 years (whatever they know). My point is that 6.5% is no guarantee and the word “only” is insulting. True, however, lower interest rates lowers the borrowing rate.
Hi Tom – Nice to hear from you. The 6.5% is in reference to the 7.5% average ROA expectation. The 7.5% target has lead plans to woefully under fund their plans through lower annual contributions. The 6.5% also means that these plans don’t have to be as aggressive in allocating assets to alternative investments.