Andy the Actuary

I received the following from Larry Shirley at the PBGC: "Prior to November of 1993, PBGC valued benefits in terminated plans using immediate and deferred factors. The immediate factors were derived so that, along with a specified mortality table (UP 84), they would reproduce prices for immediate group annuities. Group annuity prices net of administrative expenses are reported to PBGC through a quarterly survey of insurers conducted by the American Council of Life Insurers (ACLI) and administrative expenses are reported in a separate survey. Effective in November of 1993, PBGC started to use select and ultimate rates to value benefits. These rates were derived so that, along with a different mortality table (83 GAM), they would reproduce group annuity prices net of administrative expenses. Administrative expenses are added through a separate formula. Currently the pre-November 1993 immediate and deferred rates are used by PBGC only for de minimis lump sum benefit payments (benefit payments with a present value of $5,000.00 or less). When it adopted the select and ultimate rate structure, PBGC simplified the determination of the immediate rate. Using data from prior years, PBGC developed a linear equation that would closely reproduce the unloaded immediate rates from an index of corporate bond yields. That is, the equation is in the form of a * (corporate bond yield) + b. The corporate bond yield used in the equation is the average of the Moody's daily long-term AA and A rated corporate bond yield averages for the last five trading days of the month. Moody's is a corporate credit rating service and publishes these corporate bond yield averages on their website daily. This unloaded rate is then reduced to reflect administrative expenses and the result is then rounded to the nearest 25 basis points. The constants "a" and "b" are not set in stone; as a result, I'm unable to suggest a basis for forecasting, other than projected monthly changes in the Moodys Corporate bond yield averages."

Worksheet 15 PBGC, Treasury and DOL Joint Implementation Guidelines on Asset Reversions in Plan Terminations 5-23-1984

I lied. I usually work my examples to eliminate complication. I forgot that I had frozen the plan so that I wouldn't have to deal with 2009 contributions. Mea culpa.

This is an ongoing plan of a prosperous family owned company -- actually companies which comprise a multiple employer plan. The plan will have a long life after this non-family member HCE terminates. Any additional contribution will simply serve -- at least in theory -- to reduce future contributions.

Whether or not this would work for your client, it may simply be easier to amend the plan to allocate excess assets to the Plan participants. Then, you can figure out some nondiscriminatory way. For example, you might allocate the excess -- subject to IRC 415 -- based upon the present value of the non-integrated portion of the benefit without regard to any top-heavy minimum. I've yet to see a DB that codifies specifically how excess assets will be allocated. Thus, you can have your spread sheet in place awaiting your assets at point of distribution. This should work much better than trying to determine an actuarial basis to fit your assets. This is especially true if someone elects an annuity.

Not today, certainly, but perhaps tomorrow!!! Anyhoo, because the 110% determination has historically been performed as of the first day of the Plan Year, the sponsor would still need to make the contribution to get to 110% to ensure the method is applied consistently.

Let say as of the 2009 AFTAP for a calendar year plan (with January 1 valuation date) is certified to be 103% and that this Plan was frozen in 2007. So, no contribution is required for 2009. An HCE terminates employment on June 12, 2009 and wants a lump sum distribution. The Plan Sponsor is willing to pony up the additional amount to credit to 2008 so that the AFTAP after distribution would be 110%. That is (assets 1/1 - lump sum) / (FT 1/1 - 430 liability for participant) = 110%. Is it necessary to recertify the AFTAP? For that matter, forget the distribution. Suppose the same facts but the Plan Sponsor just contributes more for 2008. Is it necessary to recertify the AFTAP? The conclusion is that since the circumstances if the AFTAP were reissued would be more favorable, then there is no purpose in recertifying the AFTAP other than to make it agree with Schedule B. Agreements, disagreements, don't knows, don't cares?

Yes, indeedy. I am a bummer.

Thank you. Quite the thread; quite the needle.

The problem is that the agency was created to insure an uninsurable event. Yes, Congress will have to come up with a mechanism to take care of this deficit, but "raise the premiums substantially" is not an equitable mechanism (IMHO, not an acceptable mechanism) because it forces the "successful" to subsidize others. It forces plan sponsors to insure the survival of other plan sponsors, which is a ridiculous concept in a free-market economy. If there is ample reason to "insure" a defined benefit plan, why is there no corresponding "guarantee" to a DC plan participant that his/her account balance will never experience losses? Probably because when ERISA was conceived, there were no 401(k) plans; most DC plans were profit sharing plans and many supplemented DB plans.

(Please move to another formum if better suited) Mention the PBGC to the next 100 people you meet on the street. Probably 10 can tell you it’s a government agency. Of those 10 there may be one – and I emphasize that "one" may be an ambitious supposition – who can describe the PBGC’s who, what, when, where, why, and how with any confidence (I can’t). Yet, a blowup of PBGC could drive the financial institution bailouts to the back page of the Wall Street Journal. In the pre-financial-explosion days, the PBGC would publish its list of 50 pension plans that posed the greatest financial exposure to the PBGC. In September 2007, The PBGC announced that with the enforcement tools PPA provided to keep pension plans better funded, the annual list of 50 companies with the largest pension underfunding is no longer needed. These tools include PPA possible accelerated funding and more employee disclosure and annual reporting to government. With all this protection, however, the endangered species list seems to have slipped away from public domain viewing. Who are they? I sense the airlines are stacked up like dominoes just waiting to fall. The US auto giants may not be too far behind. What is the financial impact on the PBGC if there is a run on the bank? Will the US be forced to enter Weimar Republic mode and set the money printing presses wild to stay afloat should such PBGC financial catastrophe arise? Comment would be appreciated by anyone who has waded through the morass of PBGC annual and actuarial reports and can lend any understanding.

I get it. A few of my clients had post-termination audits conducted by the PBGC though they never visited.

Accrued benefit = benefit determined at a particular date under the terms of the plan. Part of this is nonforfeitable to the extent vested. Even if 0% vested, participant will have accrued a benefit. If we follow the logic of considering only vested benefits, then there would be no funding of a new plan until benefits were vested -- e.g., for 5 years if cliff vesting. We know that's not right.

From PBGC instructions: “Benefit Liabilities” means all liabilities with respect to employees and their beneficiaries under the plan (within the meaning of Code section 401(a)(2)). Thus, Benefit Liabilities include liabilities for all accrued benefits, whether or not vested.

Well... to continue this saga, the auditor of one of our plans asked that we change the end of year market values on Schedules D and H to their "current market value", which I assume is very recent, and definitely not the "end of the plan year" (or Dec 31, 2007). There action violates the IRS instructions. This means the SAR would have to be fictionalized as well. If this plan is covered by the PBGC, then assets reported on the 5500 and PBGC filings would disagree. Also, your assets for 430 would not agree. And, would the auditor have requested this change had assets appreciated by 20% since close of year? Survey says, number one answer, nada. If an auditor demanded this change, I would refuse and explain to the client why and instruct that the client or auditor or some other service provider would have to prepare. This would also mean preparing the next year because I wouldn't want to misstate beginning assets as well. What section of ERISA would you cite to an IRS auditor to support this work of fiction. At very least -- suppose I'm dead wrong -- I would press the auditor to cite in writing the appropriate reference which supports his treatment. To quote Dean Wormer, "I hate those guys."

Thank you. I will spin my propeller and see where it points.

Sorry (or rather happy) I have not been through this process. However, approximately how many participants in the plan? Did the plan pay the variable rate premium? Did the filing elect an exception (e.g., full-funding limitation) to paying the variable rate premium. In short, were there any red flags or is this simply another instance of being selected randomly to wear the brown crown?

The general happy-pasture-pie caveat is reasonable; to start commenting based upon asset values as September could be just as misleading as not commenting. Assets can recover.

But, I presume these are for defined contribution and not defined benefit plans? In the DC plan case, we're talking about the employees' balances being subject to the investment conditions; in the DB plan, we're talking about the employer, which could affect employees, for example, if lump sums are to be restricted.

If fixing Social Security is "easy" as Senator McCain commented at last night's debate, then why is it broken?

Have been in this analagous black hole on occasion regarding election of the appropriate determination date to determine 110% of CL and assets for restricted distribution purposes.

As my avitar shows, I crunch numbers, mostly N's and D's and the like. That's why I do a double take when the pension plan auditor says they are holding up the calendar year 2007 plan audit report until the Sept 2008 asset statement is issued. Apparently, their report needs to comment on the effect of the current market conditions. Presumably, if they had completed their audit in April, there would have issued the report without delay. I know the SAR will not comment on current market conditions. The 5500 must be signed by October 15 and the auditor still hasn't issued its report. Does this seem appropriate? Are any of your clients facing such delays?

A DB plan provides for deminimis lump sums using the 417(e) basis. At 65, a participant may elect and it is assume 100% do elect lump sum payment (>$5,000 for sake of illustration) using the PBGC interest rate [Remember These?] and 1971GAM. Like everything else in our world, we don't know what these rates will be. However, given the spread currently [PBGC 1/1/2008=3%/4%/4%/4%], we would believe that the PBGC basis will provide the greater lump sum. So, question is what is an appropriate way to recognize this? Assume for this discussion there are no pre-retirement decrements. (1) We could value the lump sum at 65 using 3% and then discount using the appropriate single segment rate. (2) We could assume the PBGC immediate rate at 65 is a percentage of the effective interest rate. (3) We could forcast a long-term PBGC immediate interest rate as the segment rates less a specified number of basis points. (4) We could ignore the PBGC basis. Any thoughts? Also, does anyone have any kind of feel of how (if at all) the PBGC interest rates would relate to the yield curve

RE: Pre-retirement Mortality in lump sum calculations: Is it a matter of the least you must do versus what the Plan Sponsor agrees that the Plan will do (i.e., what the Plan says)? Clearly, words in the law and the Plan do not cover every nuance (or is that nuisance?). Often, it is a matter of recommending doing what is reasonable so long it is done in a uniform and consistent manner. Heck, I don't know what I was getting at. I'll try to find out and bring it to ya. Okay, only about feeling weird about calculating in accordance with the law that does not particularly make sense. Attempting to incorporate market rates in your lump sum calculation and then allowing that your interest rate could be 16 months old (e.g.. Aug '07 interest rates for December '08 distribution) not only seems weird but frustrates the purpose. But, so what?

Whether or not the Plan is silent (most are), the Plan in operation must provide an immediate QJ&S if it provides for a volutary election to take a lump sum in excess of the cashout limit ($5,000). So, such immediate annuity has a PV which can be compared to the lump sum.