Funding under PPA 06

[Guest lerieleech]

Wanted to check on something.

Say we have a one-participant plan. Participant is age 50 and NRD is 65. The plan provides for lump sums. Normal form is life annuity.

It seems to me that despite the fact the participant could take a lump sum at age 65, the present value determined for funding is based on a life annuity. In other words, payments projected from age 65 to 69 11/12 are converted using the second segment rate, and everything after that is converted using the third segment rate.

However, I thought I read something somewhere that said that if a lump sum was assumed to be paid at NRD, the entire benefit was to be converted using the second segment rate.

Just wanted to throw that out there. I am thinking that last notion was incorrect, but I want to make sure.

[SoCalActuary]

If you are making the actuarial assumption that a lump sum will be paid, then you are also making the assumption of what that lump sum amount will be. This requires some assumption of what the future yield curve will look like at the date of the distribution.

This issue is not resolved yet.

Assume this scenario:

Lump sum values are paid on an actuarial assumption that will always be more valuable than 417e.

Lump sums will not reach the 415 limit on their payment.

Then you could make a reasonable assumption of the lump sum that would be paid at that future date.

In your scenario, that payment would be discounted at the second tier rate.

[mwyatt]

W/ the lump sum at NRA being valued at whatever you're assuming the appropriate assumptions at that point to be; this also begs the question of the "penalty" of double use of 1st and 2nd segment rates a nonstarter. I know that this point was raised at the EA meeting last spring (that if you are assuming that lump sums would be paid, assuming 417 payment, that you would get a PV at NRD making some sort of assumption of what 1st, 2nd, and 3rd segments would be at NRD, then discounting back at the regular segment rates, was some sort of penalty). However, given the yield curve methodology, you're trying to anticipate what payments would be at some future time; 30 years from now, the lump sum under 417 would again be reflecting a future yield curve. And again, this whole exercise does bring up the angels dancing on the head of a pin/false precision argument, but so it goes.

Not sure if I'm explaining this thought correctly, but intuitively the whole yield curve is trying to match varying maturity corporate bond yields to the present time. So that if you have someone age 45 right now, it is incorrect to assume that at age 65 say, short term bonds would equal the 3rd segment right now; rather, one would expect some sort of yield curve would also be play at the future payment date. Given that, I would argue that an appropriate future lump sum guesstimate would reflect the future yield curve 30 years down the road. The yield curve isn't saying that short term rates 30 years from now would reflect the current 30 year yield; if you're trying to posit that point, you're going to have to think what short term rates would be like in the future, which is an entirely different point.

This also, for those of us in the small plan market, begs the question of the "1 woman" maxed out plan. Sure wouldn't want to be funding on female rates at retirement, knowing full well that the lump sum will have to reflect unisex.