FAS 87/132 Disributions

[dmb]

FAS isn't one of my strong points. Regarding distributions, i understand distributions weighted for timing and actual distributions. However, i'm a little confused about expected distributions and the interest on them. Are expected distributions only for retired participants in pay status?? and is the interest on expected distributions only on those distributions or is the interest on the expected distributions the interest on the weighed distributions. Please help!! thanks.

[david rigby]

I suggest you include any distributions expected, not just for existing retirees. Typically, this will be consistent with your actuarial assumptions. For example, if you expect all employees to retire at age 65, then that will assume a 67-year old active employee retirees immediately.

The "weighted for timing" is a tool that allows you to determine the appropriate amount of interest to give to your expeted distributions. But don't overanalyze it; whether you use a 13/24 weighting for retirees, or a factor of 1/2, is usually immaterial. Other weighting for lump sum payments can be material.

[dmb]

Thanks. I'm ok with the weighting. But my main concern is about lump sums paid prior to NRA. Are they considered expected distributions??

[Guest dsyrett]

It depends on your assumptions. In theory, you apply your preretirement decrements to come up with an expected distribution component for that year due to preretirement decrements.

[MGB]

Note that dsyrett's explanation should be followed EXACTLY. If your assumption is that 2% will decrement in the next year with total lump sums of 100,000, the expected benefit payment is 2,000. This is true even if only one person is being valued and the actual lump sum can only be zero or 100,000.

You should not adjust for benefit payments (e.g., a pre-retirement lump sum) that actually occur that you had not assumed would occur at the measurement date. I.e., the adjustment should be based on your knowledge at the measurement date, not what you know later in the year as you are doing the calculations. The same is true for expected contributions.

Note that the adjustment for these cash flows is done for interest on both the obligation side and on the asset side. Therefore, the bottom-line result is only affected by the difference in these two rates (the discount rate and the expected return on assets) times the timing of cash flows. As PAX said, it should result in a very insignificant change to the bottom line however you do it.

[mwyatt]

Note also that "significant" lump sum distributions would also be taken care of (or should be) using FAS-88.