Interest rates after PPA

[FAPInJax]

OK. The new bill (once it is signed) has set the interest rates back to PFEA levels in many cases.

Current liability uses PFEA for 2006 and 2007.

Minimum lump values use 30 year Treasury rates for 2006 / 2007???

PBGC uses what??

415 lump sums use the greater of 5.5% or the plan rate (with one additional kicker about the rate that would have provided a lump sum of not more than 105% OF THE 417(e) numbers - not sure where this one came from)

Is my understanding of the current situation correct?

[SoCalActuary]

PBGC premium based on 85% of corporate bond rates, as in 4010 disclosures.

The conference report also discusses this.

[FAPInJax]

Thanks! I must have missed it during my 'brief' overview.

[Guest merlin]

What about the continued use of the 30-yr t-rate in the RPA CL for funding? We've already done quite a few 1/1/06 valuations on that basis.

[Guest Steve C]

It does seem that the bill simply replaces the 30-year T-rates with the composite corporate bond rates. The old and new permissible ranges won't overlap (90% of ~5.77% exceeds 5.10%), so sounds like an opportunity for mass revisions. Not what I was looking forward to, but it will certainly help some clients.

[rcline46]

And the same idiocy rules! Funding rates should never, ever, ever be Higher than payoff rates. If they are, then you are deliberately, with malice aforethought, underfunding a plan. As an actuary that is, in my opinion, not providing the proper service to your client. Now if your assets have consistently returned higher than the funding rates, then there is a reasonable position to recognize this in your discount rates.

Plans that ONLY pay annuities from plan assets need to look to corporate health to determine if they should use insurance company purchase rates. Plans that pay lump sums need to watch true performance and the current (constantly changing!) IRS rates. But assuming a 7% APR and 8% discount today borders (in my opinion of course) on malpractice.

Unreasonable rant over.

[Guest Jeff Hartmann]

PBGC premium based on 85% of corporate bond rates, as in 4010 disclosures.

Does IRS still replace the 83-GAM tables with the RP-2000 mortality tables starting in 2007, for purposes of RPA Current Liability and PBGC Variable Premium?

If so, does that mean the 85% becomes 100% for 2007 variable premium interest rate?

[Guest Jeff Hartmann]

It does seem that the bill simply replaces the 30-year T-rates with the composite corporate bond rates. The old and new permissible ranges won't overlap (90% of ~5.77% exceeds 5.10%), so sounds like an opportunity for mass revisions.

Unlike what was allowed 2 years ago, they have deleted code section 404(a)(1)(F) starting in 2006, which means that you cannot elect to disregard the Corporate Bond rate in deciding what your 2006 permissible range is for deduction purposes. If you computed a 2006 deductible limit based upon an unfunded RPA current liability using a rate under 5.19% you will need to re-compute it (unless they offer some transition relief).

[Guest Steve C]

I don't see a problem on the deduction side. The allowance of 150% of current liability less assets (not to be confused with 150% of unfunded CL) will outweigh the higher interest rate, netting out to a higher deduction.

On the minimum funding side, though, we'll need to recalculate 2006 current liability (in the absence of relief). This may just be an exercise for fine-tuning a Schedule B entry, but for many sponsors it will reduce 2006 funding requirements and lead to other "apparent" beneficial effects (higher funded percentage, lower incidence of required quarterly contributions, etc.).