Valuation benefits

[FAPInJax]

A PBGC plan has an NRD of 65 and 5. The owner, who is scheduled to retire at 65, is getting close to retirement and during a meeting states that he intends on working to 70.

What happens to the various benefits legally?

My opininon is as follows:

Funding for the plan benefits depends on whether a benefits suspension notice needs to be invoked. A projected benefit at 70 (greater of AE or current formula) could therefore be used OR the current benefit at the later retirement age. This is therefore an assumption.

The question concerns other calculations.

For current liability, my inclination is to use the same methods and assumptions as my valuation.

Am I required to ignore this new valuation 'assumption' and use the participant's normal retirement age for purposes of the current liability calculations? This would obviously impact the current liability calculations and the PBGC premium calculations as well (assuming the general method was being used).

I could not find any cite other than that the assumptions should match those used in the valuation except for required interest / mortality changes. Any comments are greatly appreciated.

[MGB]

This is an actuarial standards issue. You are required to use your best estimate of future events for assumptions in the valuation, unless overridden by external dictates (like the law), which only apply in the CL for interest and mortality.

"Funding for the plan benefits depends on whether a benefits suspension notice needs to be invoked. A projected benefit at 70 (greater of AE or current formula) could therefore be used OR the current benefit at the later retirement age. This is therefore an assumption."

I don't understand what you mean by this being an assumption. What does the plan say? There shouldn't be any assumption here.

[david rigby]

To expand, it is acceptable to have an assumed retirement age that differs from the plan's defined normal retirement age, if the facts support it. Such ARA could be greater or less than the NRA.

The plan definition of benefit comes first, then the assumptions and method. The choice of assumptions does not determine the benefit. Whether a suspension of benefits notice was issued is (maybe) part of how the benefit is determined.

[mwyatt]

Not sure on the "current benefit at future retirement age" reference. I think that what you are trying to do is to make an assumption as to Expected Retirement Age for your owner (only), which in this case is after Normal Retirement Age under the Plan. I've seen that done, and really don't have a problem per se with that type of assumption, but I would think that since you are assuming that your owner will be working until age 70, that your projected benefit for funding purposes should reflect that fact (i.e., do the steps through actual benefit v. prior year's with actuarial increase through ages 65 to 70). Now for Current Liability calcs, which use AB only, I would again use the current AB calculated at 65, then actuarially increased to age 70. This may or may not equal your projected benefit at 70, depending on formula, salary history, etc.

Unfortunately, due to the economic downturn and severe asset losses, an assumption that your owner will work past NRA is very reasonable, at least in the real world.

As far as the variable rate premium goes, (I'm assuming this is a small plan), odds are that once the guaranteed benefit limitations are applied to your owner (remember that the PBGC maximum guaranteed benefit phases in over a 30-year period for substantial owners), PBGC's potential exposure is most likely slim to none in this case.

[Blinky the 3-eyed Fish]

As far as the variable rate premium goes, (I'm assuming this is a small plan), odds are that once the guaranteed benefit limitations are applied to your owner (remember that the PBGC maximum guaranteed benefit phases in over a 30-year period for substantial owners), PBGC's potential exposure is most likely slim to none in this case.

I am just curious what is meant by this paragraph. Are you saying the guaranteed benefit limitations affect the variable rate premium?

[mwyatt]

Hey Blinky:

No, didn't mean to imply that the guaranteed benefit levels affect the variable rate premium (certainly you use the full accrued benefit for premium calcs).

What I meant was that for most small plans where the owner has a substantial benefit (particularly if the Plan is top heavy), the PBGC's real exposure in many cases is zero. Let's say you have an underfunded plan with the owner's accrued benefit say around $70,000/year. Plan has been in existence for 15 years. If the PBGC was to actually take over this plan, first haircut would be to the guaranteed amount, so the $70,000 gets lopped down to around $40,000. Next haircut is due to the fact that the PBGC guaranteed amount phases in over a 30-year period for substantial owners, so he loses another $20,000 ($40k x 15 / 30), so the underfunding from the PBGC's standpoint is drastically reduced, if not eliminated. Now certainly this isn't always the case, but I've seen enough of them to wonder why small plans should really be paying for the steel, auto, and airline industries when the effective "coverage" provided by the PBGC is minimal. My comment (and I'll admit I'm going off on a tangent/rant here) was whether worrying about how the change to XRA would affect CL and hence PBGC premiums struck a nerve.

[Blinky the 3-eyed Fish]

Tell me about it. I had just had to inform a 3 person plan, where 2 of the participants are owners, that they owe a 4K premium. However, not one dime would be covered by the PBGC under any circumstance in this plan.

[FAPInJax]

Well, as usual, typing muddled the idea I was trying to get across.

MGB

You are correct regarding the suspension of benefits notice. Either one is required by the plan or not and it was either given or not. NOT an assumption!

Thanks for comments from everyone else.

A clarification:

The valuation for minimum funding recognizes the 'postponed retirement' assumption and values the postponed benefit.

There was a discussion on another benefits site (PIX) that this assumption could NOT be recognized for PBGC General Method purposes. The General Method required the use of the actual retirement date / age - NOT an assumption of where he might retire.

PS The rest of you are correct in that the small plans have forever paid for the large plans which are severely underfunded. This is despite the attempt to use the variable rate premium to absorb some of the shortage. Maybe the variable rate should be just that, a higher rate depending on how short the plan's funding is.

[mwyatt]

Actually I'd vote for small plans that the Variable premium would only be based on the benefit as limited by the maximum amount that PBGC would cover. Assuming that your client obeys the early termination restrictions, premium should focus on plans that are really in danger of creating liabilities for PBGC.