PPA 430 Valuation - Lump Sum PBGC

[Andy the Actuary]

A DB plan provides for deminimis lump sums using the 417(e) basis. At 65, a participant may elect and it is assume 100% do elect lump sum payment (>$5,000 for sake of illustration) using the PBGC interest rate [Remember These?] and 1971GAM. Like everything else in our world, we don't know what these rates will be. However, given the spread currently [PBGC 1/1/2008=3%/4%/4%/4%], we would believe that the PBGC basis will provide the greater lump sum. So, question is what is an appropriate way to recognize this? Assume for this discussion there are no pre-retirement decrements.

(1) We could value the lump sum at 65 using 3% and then discount using the appropriate single segment rate.

(2) We could assume the PBGC immediate rate at 65 is a percentage of the effective interest rate.

(3) We could forcast a long-term PBGC immediate interest rate as the segment rates less a specified number of basis points.

(4) We could ignore the PBGC basis.

Any thoughts? Also, does anyone have any kind of feel of how (if at all) the PBGC interest rates would relate to the yield curve

[Mike Preston]

Which one of 1 through 3 is your best estimate? Use it.

[Andy the Actuary]

Which one of 1 through 3 is your best estimate? Use it.

Thank you. I will spin my propeller and see where it points.

[Andy the Actuary]

I received the following from Larry Shirley at the PBGC:

"Prior to November of 1993, PBGC valued benefits in terminated plans using immediate and deferred factors. The immediate factors were derived so that, along with a specified mortality table (UP 84), they would reproduce prices for immediate group annuities. Group annuity prices net of administrative expenses are reported to PBGC through a quarterly survey of insurers conducted by the American Council of Life Insurers (ACLI) and administrative expenses are reported in a separate survey.

Effective in November of 1993, PBGC started to use select and ultimate rates to value benefits. These rates were derived so that, along with a different mortality table (83 GAM), they would reproduce group annuity prices net of administrative expenses. Administrative expenses are added through a separate formula.

Currently the pre-November 1993 immediate and deferred rates are used by PBGC only for de minimis lump sum benefit payments (benefit payments with a present value of $5,000.00 or less).

When it adopted the select and ultimate rate structure, PBGC simplified the determination of the immediate rate. Using data from prior years, PBGC developed a linear equation that would closely reproduce the unloaded immediate rates from an index of corporate bond yields. That is, the equation is in the form of a * (corporate bond yield) + b.

The corporate bond yield used in the equation is the average of the Moody's daily long-term AA and A rated corporate bond yield averages for the last five trading days of the month. Moody's is a corporate credit rating service and publishes these corporate bond yield averages on their website daily. This unloaded rate is then reduced to reflect administrative expenses and the result is then rounded to the nearest 25 basis points.

The constants "a" and "b" are not set in stone; as a result, I'm unable to suggest a basis for forecasting, other than projected monthly changes in the Moodys Corporate bond yield averages."