Calculation of PBGC Variable Premium Liability

[richard]

Say we have a pension plan with age 65 normal retirement and a lump sum feature (using GATT rates). Also, let's say that for funding purposes, the actuary is assuming 7% preretirement interest and that all employees will take a lump sum at the assumed retirement age of 65. Currently, the GATT rates are about 5.2% and the PBGC interest rate for the variable premium is about 4.5%. For valuation purposes, the actuary uses the current GATT rate to determine the lump sum.

Is the present value of vested benefits for PBGC Variable Premium purposes equal to the lump sum (calculated at 5.2%) discounted at 4.5%, or the value of the age-65 life annuity discounted at 4.5%. The former will obviously produce a lower PVVB, since the lump sum (per the actuary's assumptions) will be less than the age-65 value of the annuity at the PBGC's 4.5% discount.

As a second question, I have seen actuaries assume lump sum will be paid, but do not assume the current GATT rates will remain constant. Rather, they assume a specific GATT rate in the future (for example, 6.5%) in the funding calculations. In this situation, would the PVVB for PBGC purposes be calculated as the lump sum (determined at 6.5%) discounted to the present at the PBGC's 4.5%?

[Guest Mr. X]

The vested benefits are determined in one of two ways (note this is a cursory explanation):

Alternative Calculation: Use the RPA mortality and interest assumptions as done in the valuation.

General Rule: Use the required interest rate and RPA mortality.

The RPA purchase rates to use do depend on whether the valuation values a life annuity or joint and survivor payment. The other factors you mentioned have no effect whatsoever.