Withfrawal Liability Interest Rate

[Guest Philip Anthony]

Can anyone give me an idea of what interest rates are used to calculate the UVB? How has this changed over the past few years as rates generally have dropped? Does the PBGC put a cap on this rate?

[KJohnson]

This was a 2000 survey, but it has information regarding interest rates. It is a Segal survey and not surprisingly most of the multis used the "Segal Method" of a blended interest rate which I think uses the PBGC rate for the funded portion of the plan and the funding interest rate assumption for the unfunded portion of the plan.

http://www.segalco.com/publications/survey...ndingsurvey.pdf

[Guest Philip Anthony]

Wow, that would mean the funded UVBs would now be determined using 5.7% for 25 years, 4.25% thereafter? That's brutal given asset performance the past few years (and the past few weeks!) Can't afford to stay in the plan, can't affort to leave it either. Ouch!

[Guest Keith N]

I agree that the Segal Method is a very sound conservative method, but I don't know how widely used it is.

At the most recent EA meeting, during the multi-ER workshop, a "show of hands" survey showed that over half of the people in the room use the funding valuation rate for withdrawal calculations. Keep in mind that is generally hasn't mattered for years since the asset returns have kept most plans overfunded.

I have also seen GATT rates being used.

I think you need to know what the Plan has used in the past. I think you would put the Trustees in a difficult spot of they always used the funding rate and 6 employers withdrew w/out any assesment, then you changed the method to PBGC and "wacked" the 7th one with a payment. I think the 7th w/drawing ER could agrue that you set a precedent by using the funding rate and you shouldn't treat him any different.

[KJohnson]

Of course with a Segal survey you would expect mostly Segal plans (and therefore the Segal method) but there is a note in their appendix where only 6% of the 462 plans surveyed (at least for the 2002 survey) were using the funding assumption:

For a small number of plans (28 out of 462, or 6 percent)

the ongoing funding assumptions are used as the basis

for determining withdrawal liability. For these plans,

assets are taken at their actuarial value.

I rember back in the mid-1980s there were repeated attacks by employers in withdrawal liability arbitrations challenging a plan's use of funding assumptions and advocating the Segal method. Now, given the way things have turned with regard to interest rates, I believe that the Segal method is being attacked by empoyers in favor of funding assumptions.