GATT Rates

[Guest 4sachmo]

I am aware that "GATT" rates are derived from the 30-year Treasury yield rate, however I am confused as to how these are used in calculating minimum protected cash and "WHIPSAW" formulas in my Plan. The GATT factors I see being used in sample calculations include 129.97 for a February 2001 retirement date and 112.81 for an August 2000 retirement date. How are these factors related to the 5.45% and 5.72% rates released by the Fed Reserve for those months??

[david rigby]

I think we need a bit more info to help you. Date of birth? Normal form of benefit payment (such as life annuity)?

[Guest 4sachmo]

This is for a cash balance plan where either a lump sum payment or an annuity can be chosen. For the examples I gave:

Feb 2001 desired retirement, DOB 1-20-36, NRD 1/1/01, Female

August 2000 desired retirement, DOB 4-22-37, NRD 4/1/02, Male

[Gary]

I'm not sure if I understand your question, but w/r/t whipsaw, this occurs if the interest crediting rate exceeds the lump sum interest assumption.

So if that is the case then you would project the balance to norm ret age, compute the NRD accd ben and then determine the prsent value using plan lump sum assumptions, which must include the 417(e) minimu requirements.

[Guest 4sachmo]

I'm trying to figure out how the 129.97 and 112.81 factors were determined. Are these really purchase rates determined using the GATT rate for the retirement year and a mortality rate? (My plan used the UP84 mortality rates.)

How would I recalculate the 129.97 and 112.81?

:confused:

Thanks!

[Guest Hans Moleman]

Based on the interest rates and mortality tables you provided, I don't tie out to the figures you show as being the purchase rates. There's something more that we don't know. As far as figuring purchase rates out, you need a DB program or some actuarial knowledge. I couldn't explain it in a post.

[david rigby]

Hans is right that this cannot be explained in a post, but I'll try a generic comment.

A lump sum distribution from a defined benefit pension plan is the "actuarial equivalent" of the lifetime annuity otherwise determined under the plan's benefit formula. The term "actuarial equivalent" or "present value" refers to a lump sum, payable as of a particular point in time, that is equivalent in value to all future payments. "Equivalent in value" means that all future payments are discounted for the anticipation of future events and time. Discounting is from anticipated future payment dates back to the lump sum payment date. Payment of such lump sum is in lieu of, not in addition to, future monthly or annual payments.

By its very nature, any actuarial calculation of present value includes one or more assumptions regarding the anticipation of future events. The actuary uses professional judgement and training in determining such assumptions. In the case of a lump sum benefit, federal statute/regulations have specified certain assumptions, as a minimum. The assumptions relevant here are:

· The use of an interest rate to anticipate the time value of money.

· A mortality table to anticipate future life expectancy.

(Some actuarial calculations include assumptions for future rates of turnover, rates of disablement, salary increases, cost of living adjustments, etc., but such items are assumed to be irrelevant to this situation.)

For the case at hand, the lump sum is determined by multiplying the benefit (let's assume a lifetime annuity of $100 per month) by the factor: 100 x 129.97 = $12,997.

Thus the lump sum is correct only if the benefit (100) is correct and if the lump sum factor is correct.

Hans is correct that the lump sum factors given above do not seem to agree with the birth date, interest rates, and payment dates given. What other information are we missing?

[Guest Doug Goelz]

Taking a shot at what is the basis of the purchase rates you provided...

Without having all your plan's details, it may be that your plan

uses the GATT rate in effect for the second month prior to the beginning of the plan year containing the date of distribution. Assuming a calendar plan year, distributions in 2001 would be based on the GATT rate for Nov 2000 which was 5.78%. Using this rate gives an annuity purchase rate of 129.97 for a life-only annuity payable at age 65.

Applying the same concept to the distribution in 2000, the Nov 1999 GATT rate was 6.15%. The purchase rate you gave would have been to provide a person age 63 (give or take a few months) with a life-only annuity commencing at age 65 (a deferred annuity, if you will). The age 65 rate based on 6.15% is 126.283. Discounting this back to age 63 with interest only yields 112.07 (126.283 / 1.0615^2). Since this is off somewhat from the 112.81 that you provided, something else must have been considered.

Perhaps the plan pays lump sums using the greater of PBGC rates or GATT rates. The PBGC rates were used to provide the minimum lump sum value prior to the GATT legislation. Some plans have continued to use the PBGC basis if that resulted in a higher lump sum than GATT. It was common for calendar year plans to use the PBGC rates issued each January for distributions during the year.

The immediate PBGC rate for Jan 2000 was 5.0%. Based on a life annuity normal form of payment, the age 65 purchase rate is 120.436. The discount rates used to take payments back from 65 to age at distribution were 4.25% for the first 7 years and 4.0% for the remaining years in the discount period. However, even with this, you do not get the 112.81 that you provided. You can get this if you don't do things quite right...using a discount period from 8/1/2000 to 4/1/2002 of 1.6658 years, and a 4.0% rate vs. 4.25%, you get 120.436 / 1.04^1.6658 = 112.819. Who knows, this may just be coincidental. Too many unknowns to consider. But this should give you something to think about.

[Guest Len Diorio]

I have a similar problem determining a "purchase rate" for a deferred annuity.

What is the purchase rate for a lump sum as of 4/1/01 for a deferred monthly annuity at age 65 for a male born 4/24/45 assuming a GATT rate of 5.49% and the GATT '83 mortality table?

[david rigby]

Assuming that NRD is age 65, normal form is Life Annuity, and payment is made 4/1/2001, I get a lump sum factor of 6.39988 (is that enough decimals?). Multiply by the monthly life annuity (assuming no early retirement reduction factors apply), and also multiply by 12.