Plan Termination Question

[Guest mingblue]

I have a "frozen" plan whose termination date is anticipated to be 4/1/07 - the plan year runs 7/1-6/30 - the client purchased annuities for all inactives this past December - we are just now doing the 7/1/06 actuarial valuation.

I anticipate 2 bases being created as of 7/1/06 - (1) an experience base determined using the funding assumptions in place as of 7/1/05 and (2) using the annuity values for the inactive liability as of 7/1/06 & creating an assumption change base - naturally the final charges will be pro-rated for the 9 month period up to the date of termination.

It has been suggested that I only value the active life liability as of 7/1/06 and, assuming I change assumptions to anticipate their elections and respective liability as of the termination date of 4/1/07, make the before/after assumption change liability for this group my "assumption change" base.

Question : Which is the more actuarially correct way of creating the assumption change base ? do both methods produce the same base ?

[SoCalActuary]

Interesting issues:

My first reaction is that the valuation on 7-1-06 should include all participants, since the irrevocable commitments were not made by the valuation date.

In addition, you are making an estimate as of the beginning of the year for distributions from the trust that occur during the year. The fact that you know those exact amounts is cause for confusion. If you actually take the events subsequent to 7-1-06 into account for valuation, then you have effectively moved your valuation date, which is not only an assumption change, but also you have a method change.

One additional point: You are making an assumption and fulfilling your duty as an EA by making the best assumption available for that valuation, and I don't see anything to prevent you from making a reasonable assumption on the expected distributions to occur.

[david rigby]

Generally, I agree with SoCal. However, I'm not sure that "effectively moved your valuation date" is the same thing as actually changing your valuation date. Nevertheless, altering your expectation about benefits to be paid is not only practical, but needed; since the EA expects annuitiues to be purchased during the coming 12 months, that should be included as an assumption.

[Guest mingblue]

thanks SoCal & Pax for the insights and your time - I have a couple of follow-up questions (1) if the client in fact doesn't set a termination date during the plan year but has purchased those annuities for inactive lives after the 7/1/06 valuation date, would it still be appropriate for the EA to have an assumption change and use the annuity purchase price as the liability for those lives under the new assumption ? - under this scenario I can see an argument either way and (2) suppose this same client goes ahead and purchases an annuity contract for the active lives before plan year-end on this "frozen" plan and never files termination paperwork with the IRS or PBGC - no assets remain - are these actions sufficient reason for the EA to consider removing himself from this client relationship ? if so, at what point ? before the next valuation ? and suppose the EA continues the relationship - what reporting requirements does the EA need to sign off on ? the obvious ones are Schedule B and PBGC premium filing under General Method - are there others ?