Benefits Byte

October 1, 2019

PBGC Proposes Different Interest Rate, Mortality Assumptions for Lump Sum Payments

In proposed regulations published on September 30, the Pension Benefit Guaranty Corporation (PBGC) seeks to modify the interest rate and mortality assumptions used to calculate lump sum benefits in PBGC-trusteed, terminated, single-employer defined benefit pension plans. If the rules are finalized, employers whose pension plans reference the current lump sum interest rate assumptions would need to consider plan modifications.

Under current law, in plans trusteed by PBGC, lump sums are only payable if they are $5,000 or less. To determine the lump sum value, PBGC currently uses a four-tiered interest rate structure that results in a lower interest rate than is typically used by plans. The PBGC also uses the 1984 Unisex Pensioners Mortality Table for this purpose.

Under the proposed regulations, the interest rate and mortality assumptions for this purpose would be the lump sum assumptions under Internal Revenue Code Section 417(e). As stated in the preamble, “By associating an interest rate with a specific time horizon, a yield curve better approximates the present value of future benefits. As a result, the immediate and deferred structure of PBGC’s legacy interest rates has become increasingly obsolete.”

PBGC acknowledges that “a relatively small number of plans still use its legacy interest rates to determine lump sums,” but “[g]iven that the legacy interest rates’ structure and methodology have become increasingly obsolete, PBGC concluded that continued publication of the legacy interest rates for any use would be inappropriate.” Therefore, under the proposal, PBGC would publish a final set of interest rates based on a 10-year average and then discontinue the publication of those rates. Any plan documents that include a general reference to the old rates would need to consider appropriate next steps.

In its request for comments on the proposal (due November 29), PBGC is soliciting comments on which private-sector plans use these rates and for what purpose, and whether setting the legacy interest rates at a 120-month average and not then updating it would cause any undue burden. PBGC also seeks comment on whether and for what purpose other entities use its legacy interest rates.

As we have previously reported, a number of class-action lawsuits have been filed against large defined benefit pension plans on the basis that they used unreasonable actuarial equivalent factors, including “outdated” mortality tables. A Council memo offering legal theory in response to these suits is available to Council members.

The Council anticipates filing comments on the proposal. To provide input or for more information, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Diann Howland, vice president, legislative affairs, at 202-289-6700.