Pre-Retirement Decrements

[Andy the Actuary]

Actuaries will thumb-wrestle over how large an active employee population must be before actuarial assumptions have statistical significance. Like Supreme Court Justice Potter Stewart (who couldn't define pornography but knew it when he say it), I feel the same about actuarial assumptions. It would be inappropriate not to assume pre-retirement decrements for the California State Teachers Retirement System and conversely, postulating pre-termination, disability, mortality, severance assumptions for a one-person DB plan makes no sense. Plans in between are subject to debate.

Under current law, using "no preretirement decrements" certainly affects the calculation of current liability, which in turn could affect the deductible limit. I'm unaware of no printed guidance that this assumption is permissible and yet this is common treatment. However, there appears to be no legal issue with employing this assumption to compute the basic cost elements (e.g., individual aggregate normal cost) so long as the assumtpion is reasonable. To the contrary, under PPA, the "no decrements assumption" and in particular, "no preretirement mortality" affects the basic cost computation which is now prescribed by law.

Unless I am overlooking some printed word (a realistic possibility), there does not appear to be any small plan exceptions, such as in the IRS proposed 2008 mortality regulation. What are actuaries planning to do in respect of small plans under PPA? I would suspicion this question falls under the category of "don't ask."

[tymesup]

412 said either each of your assumptions is reasonable or the contribution is equivalent to what you would get if they were. Since most small plans have a death benefit equal to the PVAB, you would get a similar contribution if you had an explicit mortality decrement.

[Andy the Actuary]

Thank you, but 412 does not apply to PPA2006. So, then what?

[tymesup]

For the EOY vals, it would appear that decrements are not needed, unless you had a subsidized early retirement benefit or something like that. It's not clear that EOY vals have much future.

For the BOY val, I guess it depends on when you assume your decrement occurs. If it's after the benefit accrues, it has no effect. Maybe the decrement should be halved?