Cash Balance Plan - Brain Cramp

[mwyatt]

Have a takeover cash balance pension plan where actuarial equivalence is defined as 417 mortality and interest rates; interest crediting rate is defined as third segment rate for September of plan year (calendar year plan).

As of 12/31/2011, have my end of year hypothetical account balance; this is converted to a monthly benefit for funding using the interest crediting rate for 2011 and 2011 417. So I get a monthly benefit as of 12/31/2011 using the 2011 basis.

We now come to 2012. As we all know, 417 interest rates have nose dived. When I now compute the accrued benefit from the 12/31/2012 hypothetical balance, I'm now applying the 12/31/2012 417 basis; resulting accrued benefits (as expected) are much lower than 2011 basis due to effective higher annuity purchase rates. If I just stick with the 12/31/2011 prior accrued benefit for funding target, I'm getting trivial target normal cost in relation to allocation; for those with lower allocations, the 12/31/2012 accrued benefit is actually lower than the 12/31/2011 accrued benefit.

Approaches for determining FT and TNC?

1) Use numbers as they fall, don't let 12/31/2012 accrued benefit be lower than the 12/31/2011 accrued benefit for determining FT and TNC. Results don't appear to make sense (trivial or no TNC).

2) Use 12/31/2011 accrued benefit for FT; calculate 2012 accrual based on hypothetical allocation alone. Get reasonable TNC, but now my PVAB is higher than the ending account balance, which doesn't appear to make sense either.

3) Recompute the 12/31/2011 accrued benefit based upon 2012 basis before determining FT and TNC.

Most plans we have designed have gone with static interest rates for actuarial equivalence (typically 5% pre, 5.5% post with post-retirement mortality only) and a 5% crediting rate.

Thanks for any input.

[SoCalActuary]

Option 3 gets my vote.

[mwyatt]

Thanks for the response. So in essence, the protected benefit really is the hypothetical account balance; there really is nothing protected about the conversion to SLA at any given point?

[SoCalActuary]

Correct interpretation of my position. The monthly benefit is defined solely in the context of the conversion from balance to benefit, at a particular point in time. Unless the plan has a conversion feature for a prior non-cash balance benefit, the monthly benefit floats with each determination of the annuity conversion rate.

[mwyatt]

So no "protection" on the amount of annuity converted benefit then (which guess makes sense since in a traditional DB plan, nothing protected year by year when 417 rates ultimately return to normal rates and lump sums actually decrease in the future). And for determination of Funding Target, nothing inherently wrong in readjusting the prior year accrual derived from the beginning account balance to reflect current year interest schema.

[Guest RRO]

What does the plan say?

[SoCalActuary]

mwyatt - it's a cash balance plan, so 417e rates do not form a minimum lump sum. In your plan, they just supply an actuarial equivalence definition.

So the lump sums don't decrease when interest rates go up. The annuity payment just gets larger.

[mwyatt]

Understood; just wanted to make sure that there isn't a cutback issue on the converted annuity benefit year to year.

[Guest Mike Melnick]

Suppose the plan did not use 417(e) rates, and that the interest rate for actuarial eqivalence was lowered as a result of a plan amendment. In that case, there would a cutback issue.

Is it solely because of the use of 417(e) rates that the cutback issue is avoided?

[SoCalActuary]

Yes, Mike, that is my understanding.

[Grendel77]

I'd like to get some further thoughts on this,

My interpretation has been that 411(d)(6) does apply to the Accrued Benefit as of the end of the prior year. After a quick skim through the regs, I don't see a positive statement one way or the other; but I've been basing my interpretation on the following:

- 411(d)(6) is not specifically cited as one of the exemptions for an "applicable" plan

- the regs go out of their way to define an "accumulated benefit" as opposed to an "accrued benefit". the accumulated benefit being the formula based LS, (hypothetical account) and the accrued benefit being the associated annual ben starting at NRA.

and really, it's that distinction between accumulated and accrued that led me to think 411(d)(6) applies to the AB as determined from year to year. [of course, this is mostly a recordkeeping/testing concern if everyone elects a LS]

Critiques please?

[Calavera]

Why would you even convert it to an annuity for a valuation purposes? It is a cash balance plan.

So why wouldn't you calculate the target liability as:

TL = BOY Account Balance projected to the expected retirement age with the interest credited rate and discounted back to the valuation date with the appropriate first, second, or third valuation segment rate.

[Draper55]

my understanding for valuation agrees with calavera. 401(a)(4) testing though

would use annuity amount equivalents. i have not seen the 411(d)(6) issue

raised regarding the interest rate float but it may fall under the ancient

restriction on decling accrued benefits for participants who have reached early retirement age.