Compliance News | August 31, 2023

PBGC Proposes Revised Actuarial Assumptions

The PBGC is proposing to revise the actuarial assumptions under ERISA Section 4044 (4044 interest rate assumptions), which are used to determine the present value of plan benefits when the PBGC becomes the trustee of an underfunded single-employer DB plan, and for certain other purposes. The proposed rule provides a more timely process to keep up with changes in interest rates, modernize the mortality basis and simplify expense assumptions.

Because these assumptions are incorporated by reference in other PBGC regulations, the changes also affect certain multiemployer withdrawal liability calculations, calculations under the PBGC missing participant program and annual financial and actuarial information reporting requirements for single-employer plan sponsors under ERISA Section 4010.

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The value of pension liabilities depends on key assumptions that include the interest rate for discounting expected benefit payments, mortality rates and plan expenses.

In its single-employer program, the PBGC becomes the trustee of an underfunded DB plan if the employer is in financial distress and can no longer afford to fund the plan or is liquidating. The PBGC-required assumptions used to value plan liabilities affect the extent to which participants’ benefits are considered funded, whether the plan has sufficient assets to pay PBGC guaranteed benefits and how much the plan sponsor and its controlled group owe the PBGC.

The PBGC’s approach to valuing liabilities is to set assumptions that produce liabilities similar to the amount that a private-sector insurance company would charge for a group annuity contract covering the same plan benefits.

The PBGC also requires these assumptions for single-employer plan annual financial and actuarial reporting under ERISA Section 4010 and for determining amounts owed on behalf of missing participants.

In the PBGC’s multiemployer program, these assumptions must be used for determining a withdrawn employer’s liability in the event of a mass withdrawal. The interest rate assumptions must be used to determine withdrawal liability of a plan that receives Special Financial Assistance (SFA) under the American Rescue Plan Act, as detailed under final regulations. These assumptions are also used by many multiemployer plan actuaries in setting the multiemployer plan’s withdrawal liability interest rate — for example, as part of the Segal Blend approach.

The PBGC, which has issued a White Paper explaining its proposed process, states that the changes will have minimal impact on liabilities determined under PBGC regulations.

The proposed rule

The PBGC welcomes comments on the changes in the proposed rule, which are summarized below. Comments are due by October 17, 2023.

Interest rates

Since 1993, the PBGC has used a “select-and-ultimate” approach to determine the 4044 interest rate assumptions. The PBGC surveys private-market insurance companies for their annuity pricing and uses that information to determine one interest rate for the first 20 or 25 years and another interest rate for the remaining years. The PBGC publishes the results quarterly (based on surveys of prior quarters). This method creates a lag between the survey data and the use of the interest rates for use in the following months.

The PBGC proposes changing to a more modern and timely approach using a blended yield curve based two-thirds on corporate bonds and one-third on government bonds. This set of rates would then be adjusted by a spread defined for each point on the yield curve, determined based on continued use of insurer annuity pricing surveys. Under this approach, the interest rate assumption would be a series of rates used to discount future plan payments.

Yield curves based on current corporate and government bonds make the interest rates more timely, as well as better aligned with mandated single-employer actuarial valuation practice.

Mortality tables

The PBGC has required the use of Society of Actuaries’ tables from 1994 (GAM-94 tables) with 10 years of static improvement. It now proposes to update its mortality tables to keep them more in line with private insurers’ mortality tables. The proposed assumptions are based on the Society of Actuaries’ Pri-2012 tables. These are the same tables that the Treasury Department requires sponsors of single-employer plans to use for minimum funding, under current proposed regulations.

The PBGC’s proposed tables would be gender-distinct and would combine the tables for retirees and contingent beneficiaries. The PBGC would provide separate tables for healthy individuals (including disabled individuals who do not meet the Social Security disability standards) and for individuals who are disabled under the Social Security standards.

The PBGC also proposes to use generational mortality improvement rather than static improvement. Initially, the PBGC would use the Society of Actuaries’ MP-2021 scale based on improvement data through 2019 and update it periodically.

Expense assumptions

PBGC proposes simplifying its expense assumption by setting it at $400 per participant for the first 100 participants and $250 for each participant over 100.

The charges would be updated annually for inflation.

Next steps

The proposed changes will not be effective for valuations until the PBGC issues a final rule.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.