DB takeover problems

[C2C]

I have a takeover case where I need to do the 1-1-04 valuation (in a week!). The prior actuary changed the funding method and asset valuation method 1-1-2000. When the method was changed in 2000, the amortization period for the initial unfunded liability (or base due to change in funding method) was amortized over the wrong number of years. The old rule was used, 30 years minus the number of years the plan has been in effect, in stead of 10 years. Finally, the initial base did not consider the reconciliation account, so the balance test was off from day 1.

So, now I am trying to figure out what to do. I can match the prior valuation using the bad amortization period, etc. I think I have the choice of using the same method knowing that parts of the calculations are wrong or changing to essentially the same method. But if I choose to change to essentially the same method and somehow correct the prior errors, I start the 4 year clock ticking again for a change in the future. I don't think I can change to another method altogether because it has been changed in one of the four preceding plan years. Is that right or do I get to ignore the four year rule because it is a takeover?

Any thoughts or comments are appreciated.

[Effen]

I think you first need to explain this to the client, then go back to the prior actuary and ask him to fix it. If you sign the Schedule B and know it is wrong (which you do) his mistakes become yours.

Maybe you could calculate the required contribution assuming the bases were corrected, tell the client to make the larger contribution then you have another month to fight with the prior actuary. That way the client should be protected from the deficiency if they make a lower contribution that is corrected after the due date.

Communication with your client is critical!

Also, changing the method now will do no good. The prior schedule Bs are wrong and need to be corrected.

[david rigby]

Perhaps. If the facts presented are all accurate, then Effen is correct. (There may be other facts not yet in evidence.)

The suggestion to discuss with your client is important, because only the client (not the new actuary) has a "beef" with the prior actuary. However, the new actuary may see an ABCD issue. In such case, it is essential that you bring this to the attention of the prior actuary, quickly.

You can adopt a version of the Aggregate (or IA) method, and the problem goes away, prospectively, but does not deal with prior problems. It may not be in your best interest to adopt the Aggregate method, since that starts your 5-year clock.

BTW, you state a "4 year clock". Rev. Proc. 2000-40 indicates 5 consecutive plan years.

[C2C]

Thanks Effen and Pax for your responses. I will certainly be in contact with the client. I am trying to get a hold of the actuary for an explanation on the balance test and years used for the amortization period. I did find our that that the client has not informed the prior actuary yet of the change. So, I will probably just let them do 2004 and then have enough time to fight with them to get it all corrected or at least have them justify why they did what they did. Then I can do 2005 with a much clearer conscience and go the ABCD route if I have to.

I believe at that point, 1-1-05, I can change the funding method altogether because the 5 years will have passed since the last change.

As for the 4/5 year clock. I knew what I meant, I just didn't say it. I do understand it is 5 years.

I guess I wanted to make sure I understood the change in automatic approval of funding method rules. In the good old days it seems to me if there was a change in actuaries, you could change to a new funding method. Now, I think you have to either use "essentially the same funding method" or be able to fit into one of the other automatic approvals. So, if the funding method was changed in one of the four look back years, my only choice is "essentially the same funding method" assuming I can meet the other requirements of that approval.