PBGC Premium Alternative Method

Anyone have a decent primer on this they could share? What needs to be in the election by the Plan Sponsor to opt into this method instead of the standard method? Is there a summary of the 24 month average rates? Is that a single rate or are they segmented, that is 3 separate 24 month rates. When you chose a specific look back month for the 24 month average does that same month have to be used for each of the next 4 years you are required to use the alternative method? The standard method is pretty straight forward and verifying rates seems easy on the PBGC site. The alternative method I feel should be somewhat straight forward too but for some reason it's eluding me

This feels like something I should know but I don't do a lot of PBGC plans and most of them are under 25 where it's simply cheaper and easier to pay the small plan cap.

I have a plan that's got for them a significant VRP this year due to the very low PBGC rates and trying to see if the alternative method can reduce that substantially even though I know it means using the alternate method for at least 5 years.

This might be simplistic, but I look at the "standard" determination as being under the 417 lump sum segment rates, and the "alternative" as being under the "maximum deduction" 404 segment rates.  The PBGC sets the month for you on the standard calculation, while the month under the alternative calculation depends on the funding lookback month you might be using.

For me, I would want a sponsor to tell me in writing that they want to elect the alternative method. Then I'll prepare the premium filing using the alternative funding target. There is a checkbox to say that you are electing the alternative method, which would need to be checked.

The rates for the alternative method are just the 430(h)(2)(C) segment rates without stabilization, which is to say, they are the segment rates used for calculating the maximum deduction limit. Your premium funding target using the alternative method is just your (vested) maximum funding target.

Good question about the lookback month, it doesn't come up very often that a plan changes its lookback month. My guess is that if you changed the lookback month for funding purposes, it would also change for alternative premium funding target purposes.

Remember that the segment rates for the alternative method are 24-month averages, so they will tend to be higher (=lower premiums) when interest rates are falling, and lower (=higher premiums) when interest rates are rising, as compared to the standard method (spot) rates. With interest rates looking to rise sharply this year, I would be very careful about recommending a sponsor switch to the alternative method now, since it will lock them in to the 24-month average rates for 5 years.

Thank you both. That's very helpful. Basically the client is going to be screwed either way for 2022 premium based on the current rates since the 430(h)(2)(C) rates are driving a high enough FT as it is and it won't make a material impact on the overall premium with the downside of locking them into the alternative rate rate for 5 years.

I guess it's just the large disconnect between the stabilization funding rates under ARP getting one funding target number  and the PBGC rates for determining UVB getting another larger number.

Lou,

Here is one word of caution.   Although the Alternative Method might yield a lower premium for 2022 you will lock yourself into using the Alternative Method for 2022 and 4 following years.  Which means your plan is going to miss on the recent rates increases (which are quite material) for 2023 and beyond.   I would not do it a change to Alternative Method unless your plan is terminating soon.